Thursday, 13 November 2008
China’s Mining Companies Struggling in Downturn
With major metal prices slumping in both domestic and overseas markets, China’s non-ferrous metal industry is facing an unprecedented challenge, with all companies suffering losses in September and October. The situation shows no sign of changing before the end of this year.
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China’s Mining Companies Struggling in Downturn
13 November 2008
With major metal prices slumping in both domestic and overseas markets, China’s non-ferrous metal industry is facing an unprecedented challenge, with all companies suffering losses in September and October. The situation shows no sign of changing before the end of this year.
Zhao Wuzhuang, senior engineer at the Institute of Non-Ferrous Metals of China, said at the China International Mining Conference on November 11 that the prosperity cycle for the non-ferrous metal industry had come to an end. In the following period supply will exceed demand, and prices for non-ferrous metals such as copper and aluminium will remain at low levels.
With the prices dropping continuously, spot prices for most metals, except for copper and lead, have fallen to lower than domestic metal companies’ average production costs, making operating difficult.
“Many small and medium-sized mining companies are bankrupt, and most small lead and zinc mines in the west have closed,” said Zhao Wuzhuang.
A zinc producer from Yunnan Province, China’s major zinc production base, said a lot of mines had been closed, and all producers were facing production cuts and even halts. “The market price for zinc concentrate is now only one half of our production costs, so we have to reduce production, and one of our subsidiaries recently had to cut nearly 1000 employees.”
Due to the continuously falling nickel price, Jinchuan Group, the biggest nickel producer in Asia, has decided to cut production this year by 17%. As the current nickel price is also lower than production costs, nearly 95% of makers of pig iron containing nickel have ceased producing.
Chinalco, China’s biggest aluminium producer, has also closed down part of its electrolytic aluminium and alumina production. On October 22, the company announced a cut in its production facilities in Shandong, Henan, Liaoning, and Inner Mongolia by 0.72 million tons per year, accounting for 18% of the company’s total production capacity. By November 5, 38% of Chinalco’s alumina production capacity, totalling 4.11 million tons/year, had been laid idle.
China is the world’s largest electrolytic aluminium producer, its capacity accounting for 1/3 of the world’s total. As the production of electrolytic aluminium consumes enormous amounts of electric power, the closure of plants will cut aluminium companies’ power consumption by 5.7% and lead to surplus supply on the domestic power market. “If China fails to solve the difficulties facing the non-ferrous metal industry, economic development will be harmed,” emphasized Zhao Wuzhuang.
The government’s 4 trillion yuan infrastructure investment is expected to stimulate demand for non-ferrous products and support the industry’s development. As the main uses for copper and aluminium are in housing, the government’s construction plans for rural areas and affordable housing are undoubtedly good news for the industry. Non-ferrous metals are also widely used in transportation, and the government’s investment in railway infrastructure and road construction will also boost demand.
With the spread of the global financial crisis and a sharp decrease in bulk commodity prices, equity financing for mining companies has almost frozen. Industry insiders see no possibility of movement until at least the second half of next year.
Patrick Loftus-Hills, head of the Asian industrials group at UBS, revealed that 16 mining industry clients had suspended plans to go public in Hong Kong or other Asian markets. Some had already submitted application to the HK Stock Exchange.
Wang Yan, CEO of BOC International, a global logistics company, also spoke of the financial crisis affecting IPO and financing plans of mining companies. He revealed his company originally planned to help a Russian mining company to float in Hong Kong, but the plan had to be suspended.
“The capital market is dead. This is the worst moment for mining companies,” declared Ned Goodman, executive partner of Canada-based Dundee Bank.
Metal and mining companies share prices have fallen sharper than their commodity prices, and investors have suffered heavy losses. According to Canada-based CIBC World Markets statistics, copper prices have slumped 38% since the beginning of this year, while copper company share prices have dropped a hefty 70%.
The Hang Seng Index itself has plummeted by 80% this year, while share prices of Chinese metal companies such as Chinalco and Hunan Nonferrous Metals have all dropped by about the same. China Shenhua has declined by nearly 70%.
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