Chinese non-ferrous metals: going global?

Paul Robinson - 11 June 2013

As China experiences an economic slowdown the domestic non-ferrous industry has suffered from overcapacity and falling profits.  This industry, which has grown phenomenally by providing metal resources to China, is now eyeing international markets to maintain growth rates.

CRU was recently invited to speak at the Shanghai Futures Exchange (SHFE) 10th Market Development Forum.  CRU also attended a private round table event with leading players from the Chinese non-ferrous metals sector including producers, government officials, representatives from the financial sector and SHFE officials.

This insight paper highlights the main issues of interest that arose during the event.

  • The two main conference themes were Internationalisation and Innovation.  These two issues were repeatedly cited as the drivers required to improve profitability in the non-ferrous sector.
  • There was broad agreement that the Chinese non-ferrous sector is suffering from massive overcapacity, poor profitability and cost inflation pressure in land costs, labour costs and environmental protection costs.  Mr Chu Juehai, Executive Vice President SHFE, estimated that profits in the Chinese non-ferrous industry had been below 4% since Q1 2012, lower than domestic interest rates.
  • A lack of innovation in the industry was cited as harmful to profitability.  Without innovation efficiency gains, that are necessary to offset increasing input costs, have been rare.
  • Non-ferrous refining & smelting producers were unwilling to directly discuss the issue of Chinese overcapacity preferring to offer solutions that would improve revenue streams and allow capacity expansions to continue.
    • Producers would like to see internationalisation of the SHFE and believe this would allow the SHFE price to normalise at higher LME levels.
    • If the government removed export taxes for basic metal forms such as lead, zinc and aluminium ingot and copper cathode, producers believe they would be able to utilise excess capacity by profitably exporting non-ferrous metals.
    • Producers also requested that the SHFE establish more domestic warehouses and allow more frequent delivery of metal to the existing warehouse network.
  • Government officials and advisors took a broader view of the Chinese economy revealing the difficult balancing act the Government has to perform with energy intensive industries.
    • Overcapacity and low profitability are recognised in a number of Chinese sectors including the steel, cement, glass making, ship building and non-ferrous sectors.
    • The government revealed it was keen to encourage a profitable non-ferrous metals sector but that it was reluctant to support large, energy intensive, basic metal exports.
    • Advisors cited the policy of encouraging industry consolidation and the closure of inefficient technology as a success.  They expect this policy to continue.  This policy has also had the added advantage of closing environmentally unfriendly technology.
    • Environmental pollution is now recognised as an important issue that will adversely impact medium term economic growth in China.  Environmental protection is now a government priority alongside economic growth although the environmental clean-up will take years to complete.
    • Mr Luo Tiejun, Deputy Director General, Ministry of Industry and IT, estimated that over 85% of recently built Chinese aluminium smelters were missing vital build permits.  Indeed many existing non-ferrous facilities were operating without the required build permits.  In the future projects with the right level of environmental protection would receive fast track permits and permissions.  This would ease issues associated with raising finance for new facilities and accelerate the replacement of capacity with more environmentally friendly technology.
  • Several SHFE officials highlighted the exchange’s desire to internationalise and expand operations.
    • There was consensus from all Chinese delegates that China has little influence on LME metals prices and that a strategy should be adopted to increase the global use of SHFE prices as an alternative. Similar discussions were held in the steel and precious metals forums.
    • The SHFE would like to attract more international money in to the exchange.  Delegates cited European pension funds as a potential client, particularly those who currently purchase S&P GSCI Index as a proxy to Chinese economic growth.
    • The SHFE issued a shopping list of innovative new products to be launched on the exchange including oil futures, iron ore, coal tar pitch, steel hot rolled coil, thermal coal, LNG, nickel and others.  There was also strong interest in establishing an options market for non-ferrous metals.

It was clear from the conference that the non-ferrous industry no longer believes in the status quo.  Chinese economic growth alone is unlikely to deliver the metal demand necessary to meet the ambitions of the domestic producers or the SHFE.  International expansion looks attractive.

However, before internationalisation strategies can be implemented fully the Chinese government will need to clarify a number of unanswered policy issues.

  • What will be the future remit of the Chinese non-ferrous metals industry?  The industry has successfully fulfilled its role to date: to provide a security of supply to meet domestic consumption needs.  Should this remit be broadened into an export role to take advantage of low costs and innovative technology in areas such as aluminium smelting and nickel processing?
  • Does China aspire to economic growth by becoming the world’s non-ferrous metals refiner & smelter?  Does China have a competitive cost base to succeed in this goal?  Would the impact on absolute levels of Chinese pollution be acceptable?

CRU believes that the non-ferrous industry will continue to play a vital part in the provision of metal to China and in the development of the Chinese economy.  If Chinese GDP remains above 7%, as CRU predicts, the government is unlikely to listen to non-ferrous producer demands and export taxes will remain in place.  After all, oversupply creates low SHFE metal prices and gives Chinese value-add semis producers a cost advantage over their international competitors. In addition CRU believes that the government will continue to nudge the industry towards consolidation and the closure of outdated, inefficient, technology.

If Chinese GDP slips below 7% the government will face pressure to boost growth and assist many industries.  This would be an opportunity for non-ferrous producers to lobby again for the relaxed export controls they seek.  In this scenario, oversupply in China could flow back to international markets pushing global metal prices even lower.

For information on how CRU can help you understand the commodities markets through our suite of products and tailored solutions, please contact sales@crugroup.com

Author

Paul Robinson 2.jpg

Director - Multi Commodity Projects
Paul Robinson joined CRU in 2005 following a 12-year career in the power sector. Paul has been Director of Multi Commodity Projects since 2012 and he is focused on developing a number of cross-commodity services for CRU. Mr Robinson holds a BSc (Hons) Systems Modelling from Sheffield Hallam University. He is a member of CRU’s Executive team. 

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