Economic woes hit China's metals industry
As the Year of the Ox dawns, China's impact on world metals supply, demand and pricing is collapsing. The country's home-market economy is headed for single-digit expansion and a probable drop in exports.
By Tom Stundza -- Purchasing, 2/12/2009 2:00:00 AM
Economic growth is faltering in China, which is reducing home-market manufacturing, shutting old and inefficient factories, delaying capacity expansion programs and causing buyers and suppliers to prepare for a falloff in demand for steel, nonferrous metals and other industrial raw materials. The World Bank has a forecast of 7.5% growth in Chinese gross domestic product in 2009, the weakest annual rate of GDP expansion since the 7.1% growth in 1999.
With less metal needed at home in 2009, shipments from China into the U.S. and other export markets might be expected to grow this year, except that faltering economies elsewhere are reducing global need for these materials. In fact, demand worldwide for steel and nonferrous metals has all but dried up over the last several months. China's copper consumption growth, for example, may be as low as 2% this year, down from 6% in 2008.
Customs China reports that steel mill product exports dropped 5.5% in 2008—with most of the cutback evident in the final quarter. Preliminary data shows that China's exports and imports of metals and all other materials and products both fell for the second consecutive month in December.
The weak trade data for the world's third-largest economy shows that China isn't just suffering from a global economic slowdown but also from deteriorating local demand. So, the Chinese government increased export rebates for high-value-added steels on January 1, on finished aluminum products on February 1, and may do the same for other materials and products to spur export demand as the year progresses.
However, buyers have continued to back away from longer-leadtime imports such as steels, even if prices are slightly lower than world averages, due to continued economic uncertainty as well as the lack of available credit for global trade. And, since it takes five months from order to delivery for Chinese metals, there have been decreases in Chinese exports into Europe and North America. A slight pickup in December imports into the U.S. from China has been traced back to orders in August—just before the slippage in U.S. home-market prices. As for Chinese prices, it's now known that China's home-market steel and commodity prices being published are 20% to 30% higher than current physical-market transaction prices.
Beijing Antaike Information Development Co., the government's statistics bureau, estimates that Chinese crude steel output will drop this year, leading a global drop in production of at least 10%. The information bureau says that many Chinese steel firms began slashing output last September.
Also, several Asian metals analysts have told the China Daily newspaper that they forecast accelerated production cuts in China of all metals for some months to come—which could set the stage for boosted exports and prices in 2010, if the world economy improves next year.
China has a massive $600 billion, five-year spending package, including infrastructure investments, to revive domestic demand of metals. However, there is a cash-flow problem in the country with thousands of workers not being paid. So, instead of growing, industrial output has been slowing, according to news reports quoting Fan Gang, an adviser to the nation's central bank. That's why the Chinese government plans to increase its money supply by 17% this year.
The Chinese economy was driving demand for commodities during the past five years as its booming manufacturing and construction industry bought huge supplies of such raw materials as iron ore, scrap, copper, alumina and aluminum. This had led to a boom in prices for metals, but as the Chinese economy began to slow in the fourth quarter prices started to collapse.
Prices of nonferrous metals continue to be weak because "problems in the global economy continue to weigh on investment sentiment in the base metals markets," writes MF Global analyst Edward Meir in a note to clients. Aluminum traded at 69¢/lb on the London Metal Exchange (LME) in January, "where warehouses still are bulging with stocks," he says. So, China's Shanxi Guanlu is shutting 40,000 metric tons of aluminum capacity—including 6,000 metric tons of annual high-purity-grade capacity—due to low prices and weak demand. "The tonnage taken off amounts to 36.4% of its aluminum capacity, but in the grand scheme of things, is a drop in the bucket," Meir says.
Chalco temporarily closed 720,000 metric tons of aluminum smelting capacity last October, and industry sources tell Reuters that the firm might introduce more cuts soon. About 4 million metric tons of existing aluminum capacity in China is estimated to have stopped production since the second half of last year, with another 4 million metric tons of new capacity not starting production yet.
No quick rebound for economy
Tom Albanese, the chief executive of Rio Tinto of Australia and key supplier of raw materials to Chinese metals firms, tells The Times of London that "the fourth quarter of 2008 was far worse than anyone expected in China." Albanese expects a pickup in China's manufacturing and its demand for commodities in the second half, noting that "we are unlikely to see an improvement in the first quarter or second quarter of this year."
Chief economist Fan Jianping at the State Information Center also believes China's economy is unlikely to rebound quickly in 2009 even with further loosening of monetary policy. He tells the China Securities Journal that producer prices for raw materials and finished goods are likely to deflate in the first half, which will keep consumer inflation low and keep businesses from generating the cash needed to modernize or expand.
Zhang Xiaoming, director of Guangdong Household Electrical Appliances Trade Association, says the sharp depreciation of the South Korea won has caused many Chinese factories to lose overseas orders of such small home appliances as rice cookers, roasting pans, coffee machines, electric kettles, soy milk makers and juice extractors to South Korean firms.
Chinese nonferrous metals buyers have remained just as cautious as purchasing personnel elsewhere in the world and are placing fewer orders for metals in early 2009. That's because of reduced production by the country's home appliance industry, especially producers of refrigerators and air conditioners.
The country's copper buy may be 5.2 million metric tons this year, up 2.1% from around 5.1 million metric tons last year, according to Beijing Antaike, the state-owned nonferrous metals information house. Earlier forecasts of expanded power industry purchasing because of the government stimulus package for infrastructure projects are being pushed into 2010. China's copper output rose from 3.41 million metric tons in 2007 by 9% to 3.75 million tons in 2008, but Beijing Antaike has much smaller 3% smelting growth rate forecast for 2009.
According to Beijing Antaike, real output of Chinese aluminum ingot was around 13.4 million metric tons in 2008, an increase of 5.5%, or 700,000 tons, from 2007. Chinese production of aluminum in 2009 is forecast at 13 million metric tons, a 3% drop from 2008. Already this year, Aluminum Corp. of China (known as Chinalco), the world's second largest alumina producer, has cut the price of alumina by 23% to $292/metric ton because of shrinking demand.
Meanwhile, China's State Reserve Bureau bought 300,000 metric tons of aluminum from eight smelters at 79¢/lb in January in an attempt to push up prices and support domestic producers, the Shanghai Securities News has reported. The State Reserve Bureau maintains stockpiles of key raw materials. The price paid represented a 10% premium above local market levels and 15% premium over London Metal Exchange prices.
The newspaper report says this is the government's first move in the current market crisis to prop up the ailing nonferrous metals industry. Slumping prices and weak demand, due to the global economic crisis and China's slowdown, have forced smelters to cut production. Zhang Ping, minister in charge of the National Development and Reform Commission (NDRC), delivered an economic report to the Standing Committee of the National People's Congress, the top legislative body, saying the central government will relax export controls, stockpile metals, offer electricity subsidies and raise loan ceilings.
The southwestern province of Yunnan has bought a million metric tons of copper metals from local smelters and neighboring Sichuan province has reduced electricity prices for smelters. Various central and provincial agencies also are planning to buy up to 1.5 million metric tons of excess aluminum. "These procurement plans will help companies tide over the crisis," says analyst Heng Kun at the Essence Securities brokerage in Shenzhen.
The government stockpiling of copper and aluminum "indicates a strong desire from the central government to support the aluminum smelting industry that has been severely affected by the steep fall in prices," says analyst Henry Liu at Macquarie Group. He also believes the central government "is keen to buy raw materials at what it believes will prove to be cheap prices" in the future when China's long-term economic development resumes strong growth.
China's production of steel in 2008 increased by just 3% to an estimated 502 million metric tons, but production of mill products dropped 11% to 430 million because of reduced second-half production. Also, as a reflection of overseas customers' falling demand and reduced home-market purchasing power, China's finished steel exports declined by 28% while imports dropped 24%. China's apparent steel consumption rose by just 5%.
Steel prices inside China are erratic—sometimes reflecting domestic or export demand, sometimes reacting to government export value-added taxes. Based on Chinese market reports from Macquarie Bank and MEPS (International), it appears the downward price correction in the Chinese flat-rolled products sector bottomed in November, prompting the domestic mills to reduce production in the face of depressed demand from such downstream industries as automotive and home appliances. However, the Chinese government's new investment package is designed to boost domestic steel demand.
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