Although the global market for non-ferrous metals is not promising, China is taking actions to revive the market.
As the recession continues unabated, the global outlook forthe non-ferrous metals market does not look rosy. Let us take aluminum as an example. Due to recent cutbacks by large aluminum companies, the monthly production of aluminum continues to decline (China excluded). In September, there were still a number of aluminum plants facing the risk of closure in Europe and the United States. Furthermore, there are only a handful of new capacity projects in the industry,most of which are located in the BRIC countries.
India, for instance,has only one new project compared to nine new projects during the previous year. Hindalco (One of the world’s largest aluminum rolling companies),is planning to build a smelter plant with production capacity estimated at 360,000 tons of aluminum per year. The project is currently being tendered and if all goes well, is expected to commence at the end of the year. Hindalco claims that even in the face of rising energy prices and a world-wide reduction in aluminum production, India will not cut output. Despite Hidalco’s best effort to signal a positive outlook to the market, its stockprice has already suffered a 6.4% drop during the last quarter, indicating otherwise.
The situation gets bleaker when we consider theRussian aluminum production industry. UCRUSAL (the world’s largest aluminum producer) announced that their Ivor Morton aluminum plant in Jamaica will shut down in October, leading to over 600 job losses. The closure means that RUSAL’s entire Jamaican operation will beshut down.The Jamaican government has already accepted the request from RUSAL asking for a one-year shut down. UCRUSAL announced an output reduction of 275,000 tons, almost 7% of its annual output.
The Brazilian aluminum industry is also struggling and facing great pressure due to high energy prices. “We have already invested 3 billion US dollars there, but to be honest, we do not look forward to return within the year,” said Klaus Kleinfeld the CEO of Alcoa Inc. “One of the reasons is the high cost for energy in Brazil”. The Alumar group,whichplays a leading role in Brazil’s aluminum industry,announced production cutbacks in September. Alumar’s biggest shareholder, BHP Billiton, is considering selling its aluminum property in Brazil. BHP Billiton owns 36% of Alumar’s aluminum refinery plants and 40% of Alumar’s aluminum smelting plants.
The Chinese market for non-ferrous metals has however rebounded in September. Eight kinds of non-ferrous metals monitored by the PPI (China’s authoritative data collecting company focusing on bulky commodity and its raw material) performed well in September. Smelting enterprises’ capacity utilization in China continues to increase and in September the utilization rate for copper smelting enterprises reached an all-time high of 90% for 2012. In addition, according to PPI data, among the twelve monitored companies in the steel industry, nine enjoyed sharp increases (4.5% to 10%) in their stock prices, a notable contrast to elsewhere in the world.
China’s ability to weather the global recession, in contrast to other BRIC countries, is in essence derived from two factors. Firstly the Federal Reserve’s quantitative easing policies have stimulated demand and helped to increase utilization rates on a global scale, China included. Secondly and more importantly, the support from the Chinese government has led to an industry boost. On Oct. 9th, Jiangxi Provincial Government decided to purchase and store non-ferrous metals, especially copper, tungsten, rare-earths and other strategic resource products. According to the Jiangxi Daily, the Jiangxi provincial government recently decided to establish a coordination mechanism to maintain the growth of the province’s industrial and foreign trade by making the purchase of non-ferrous metals a top priority.
Jiangxi became the second province to announce this policy after Yunnan, which started purchasing domestic products of non-ferrous metals and rare-earths at the end of September. Yunnan also announced government purchasing and storage plans, including the storage of 200 thousand tons of aluminum, 20 thousand tons of copper and 50 thousand tons of zinc.
The government’s support and control always play a crucial role in China’s industry, and further support for China’s steel and non-ferrous metal industry is anticipated. In accordance with China’s macroeconomic policies, national and local government will work to come up with further beneficial policies that help domestic non-ferrous companies. These include government purchasing plans, fund support and preferential tax treatment. In addition, as the 18th National Congress of the Communist Party of China will be held in November, more capital construction projects will be introduced, which will further stimulate the demand for non-ferrous metals.
While stockpiling is usually a sign of speculation due to low interest rates and anticipated increased demand, China asserts that this is a short term action and will not have any significant impact on the overall market. As the government’s capital construction investment is anticipated to increase (after the 18th National Congress of the Communist Party of China), the demand for non-ferrous metals will increase and thus stabilize the demand naturally while decreasing the reserves. However, the question remains: how long will the government be able to sustain these policies without endangering the economy as a whole?