China Copper Processing Industry Focus

1. Market Consumption - The ‘China Factor’and Copper Price Fluctuation

We all know China is an enormous consumer of copper, but the exact levels of consumption and where the copper has gone remains a mystery.

The simple but visual statistics of physical weight: from 2001 to 2009, the output of Chinese copper semis grew by the average rate of 20.3% each year, with an average annual growth in copper consumption of 16.7%.

In 2009, the estimated output will be over 8 million tons. In terms of product categories,copper plate&strip&sheet, copper tube and copper wire output will account for 1.4 million tons, 1.45 million tons and 3.75 million tons,respectively, 17.2%, 17.8% and 46.1% of the total, respectively. Average annual growth in copper plate&strip&sheet, copper tube and copper wire output was 18.1%, 18.7% and 25.7%, respectively, between 2001-2009.

Total consumption for 2009 was approximately 8.5 million tons, with 1.53 million, 1.27 million and 4.01 million tons respectively for copper plate&strip&sheet, copper tube and copper wire, with the three categories making up 18%,15% and 47.4% of total output of copper semis,respectively. Between 2001-2009, the annual average growth rate for copper plate&strip&sheet, copper tube and copper wire was 19.8%, 21.5% and 28.7%, respectively.

However, calculations based on the metal content of copper semis reveal an interesting difference, namely that copper usage in production and consumption is about 1 million tons less.

First, we will look at production. Between 2001-2009, the average annual growth rate of copper semis output calculated from metal content in China was about 20.9%, with total output of 7.105 million tons in 2009. The output of copper strips plate&strip&sheet, copper tube and copper wire will reach 1.25 million, 1.16 million and 3.56 million, respectively, in 2009,accounting for 17.6%, 16.4% and 50.1% of the total. Meanwhile, average annual growth rates were 18.0%, 18.8% and 25.7% between 2001-2009, respectively.

Secondly, the consumption of copper semis calculated from metal content grew by an average of 17.4% annually in 2001-2009, with consumption of 7.476 million tons in 2009. The consumption of copper plate&strip&sheet,copper tube and copper wire will reach 1.35 million, 0.99 million and 3.83 million tons, respectively, in 2009. Meanwhile, average annual growth rates were 14.6%, 15.2% and 20.7% in 2001-2009, respectively .

However, regardless of whether physical output or metal-content based output figures are analyzed, output and consumption trends China showed no remarkable change. Metal-content based analysis is expected to become more relevant from the perspective of market supply and demand.

Under this premise and taking into consideration the direct use of copper scraps in copper semis manufacturing, there was an 0.855 million tons oversupply of copper in 2009. If repeats are added, this figure jumps to 1.606 million tons.

Moreover, price information from international copper markets reveal a limited relationship between fluctuations in copper prices and supply and demand in the Chinese market. For example, there was 1.087 million tons of oversupply from metal-content calculations in the China copper market in 2007, when the international copper price hit its historic post-2001 high. Therefore, we believe the so-called“China factor” is nothing more than simple demand by the stakeholders involved or a pretext for copper price manipulation.

2. Expanded Capacity - Future Demand and Popular Products

The “Adjustment and Revival Plan for Anhui Province’s Non-ferrous Industry” says that Tongling will be built into one of the largest industrial bases for copper smelting, recycling and intensive processing, a center for copper trading and an important base of the gold industry in China. It is expected to realise 0.9 million tons of refined copper and 0.95 million tons of copper semis output by 2011 through stable growth in output and sales.

Earlier on, Yingtan in Jiangxi Province announced a plan for “establishing three bases and one center”, namely “a base for recycling,a base for copper smelting and a base for copper product processing” in addition to a “logistics center for the copper industry”. It intends to become the “World’s copper city”.

On Nov. 8th, 2008, Yingtan City was honored by CARCU as the “China Recycling Industrial Base”. This was followed by the accolade of“China Copper Industrial Base” from ChinaNIA on Nov. 28th. Yingtan’s initial plan is to build a copper smelting capacity of 1.4 million tons and a copper product processing capacity of 2.2 million tons by 2010.

In addition, other cities and companies have their own plans for a RMB10 billion or even RMB100 billion copper industry. For instance,CNMC announced its “10 billion” company plan after the reconstruction of Shandong Albetter Copper & Aluminum on Sept. 8th this year. Large investment will be made by CNMC to help Albetter expand its copper plate&strip&sheet and tube capacity.

Similarly, a number of large companies made generous gestures to new copper smelting and copper semis projects over the last couple of years. Supporting RMB1 or 2 billion projects has been seemingly straightforward.

Under this “Money-is-not-a-problem” attitude,remarkable growth in the capacity of Chinese copper semis is foreseen. However, lower capacity utilization is expected over the next 2-3 years, especially in booming sectors such as copper plate&strip&sheet and copper wire rods.

Incomplete statistics from Antaike show that among known major copper wire rod projects in China, capacity put into production between the second half of 2008 and the first half of 2009 was over 800,000 tons, and the figure from the second half of 2009 to the first half of 2010 will be over 700,000 tons. It is estimated that total capacity of copper wire rods (copper coils) will be over 3.3 million tons in 2009 and nearly 4 million in 2010.

Among the known major copper strips projects in China, capacity put into production between the second half of 2008 and the first half of 2009 was over 200,000 tons, and between the second half of 2009 and the first half of 2010,this will be over 300,000 tons. It is estimated that the total capacity of copper plate&strip&sheet will be over 1.8 million tons in 2009 and nearly 2 million in 2010.

Based on the 7.486 million tons of copper semis output and 8.85 million capacity in 2008,China’s capacity utilization was 84.6% in 2008, similar to 2003 figures.

3. Industrial Trends - The Regional Economy and “State-owned Companies In and Privately Owned Companies Out”

Along with the rapidly expanding capacity, another remarkable change in China’s copper semis industry is “regional economy”-based development.

Over the past 5 years, Zhejiang, Jiangsu and Guangdong topped China’s copper semis industry, accounting for 65% of the national total in 2004 and 2005. Over the last two years,these market shares have declined because of the rapid growth of Henan, Anhui and Jiangxi.In 2008, Zhejiang, Jiangsu and Guangdong accounted for 53.9% of China’s total, 10.7%lower than that in 2004. Copper semis output in Jiangxi and Anhui is expected to grow in the future due to the regional advantages in refined copper supply. Another trend is that stateowned companies have been growing in number while privately-owned ones have fallen.

The latest development in the “state-owned in,privately owned out” saga has, controversially,made its way into a number of statemonopolized industries such as natural resources, steel, aviation and coal.

In the non-ferrous metal industry, large stateowned companies including CHALCO, CNMC and MCC are quickly “marching” into the copper and copper semis industries. Moreover, a number of large copper smelting companies are at the same time strengthening controls on resources and trying their hands on copper semis to maximize profit-making opportunities from the industrial chain.

Policy support and abundant funding have enabled state-owned companies’ invincibility and freedom when it comes to M&A and reorganization.

First, according to SASAC’s plan, the number of companies controlled by the central government will be reduced to between 80-100 by 2010, this figure was 196 when SASAC was established in 2003. 30-50 of today’s companies will be built into large groups competitive in international markets. As of Oct. 26th, 2009,the number of SASAC-invested companies was 132.

Secondly, let’s look at the policies on industrial adjustment. The Stimulus Package for Nonferrous Metal Industry states that the nonferrous metal industry should strive for stability in 2009 and development in 2011, a further optimized industrial structure, changed means of growth and significantly improved capability for technical innovation. This will build a solid foundation for the sustainable development of the non-ferrous metal industry. In 2009-2011,progress will be made in the reorganization of companies into three to five strong corporate groups. By 2011, the output of China’s top 10 copper, aluminum, lead and zinc companies should account for 90%, 70%, 60% and 60% of China’s total, respectively. In addition, to promote company reorganization and adjust industrial layout, the plan encourages strong market players in the copper, aluminum and lead-zinc industries to realize market scale and improve competition in diversified ways. Large backbone companies are encouraged to engage in cross-regional and regional M&As and intergroup reorganization. Cross-industry reorganization between aluminum, coal and power plants as well as between recycled metal plants are also encouraged.

In summary, large plants will embrace a period of rapid expansion and industrial concentration will improve. For instance, in copper plate&strip&sheet production, the 500,000 tons capacity of CHALCO will account for 25% of the domestic total.

4. Contradiction - Trade Protection vs. Rapid Growth

In addition to the “Great Leap Forward”-like expansion and the “state-owned in and privately-owned out” trend, China’s copper and copper semis industries are also engaging in increasing trade protection. This determines whether domestic demand will be the backbone in the copper and copper semis industries continued rapid growth over the next 2-3 years.

Import statistics show that China has always been a net-importer of copper semis. The net import in terms of physical quantity in 2009 was expected to exceed 350,000 tons. Among the seven major copper semis from China Customs import statistics, namely copper powder,copper bars/rods/sections/profiles, copper wire,copper plates/sheets/strips, copper foiling (including backings), copper tubing and copper tubing accessories, copper tubing is very special as it is one of China’s three major copper semis and the most exported product.

Previously, exports of copper tubing in China accounted for 15% of total output. In 2009, this dropped to around 11%. Since the 21,000 tons of net imports of copper tube to China in 2003,net export of copper tube has been increasing annually. In 2008, 187,000 tons of copper tubing was exported, and this is expected to rise to approximately 180,000 tons in 2009. This growth has made certain people in the industry green-eyed.

The ongoing US anti-dumping investigation against copper tube from China and Mexico has drawn much attention within the industry.The ITC has recently ruled that seamless refined copper tube imports from China and Mexico have caused substantive damage and threats of substantive damage to the US domestic market. The preliminary verdict against dumping will be announced on March 9th,2010, but a 60.5% anti-dumping tax is expected, news that will have considerable impact on copper tube exports from China.

Regarding the anti-dumping investigation against China’s copper tube exports, its demonstrative effects are important as China exports are entirely foreign-demand oriented and have grown due to orders from overseas. In 2008 for example, processing-based trade (processing with client-supplied/imported materials) accounted for 90% of total exports, with normal exports less than 10%. In addition, declining foreign demand has impacted copper tube exports from China. In 2008, the net-export of copper tube from China experienced a gradual decline quarter by quarter: from 55,000 tons in Q1 to 34,000 tons in Q4. “Refined copper tube with internal/external threads/fins and an external diameter less than 25mm” dropped from 20,000 tons in Q1 to less than 10,000 tons in Q4.

From the above, we can see that the shrinking demand caused by the economic crisis will have serious consequences on copper tube exports from China. Even if unaffected by the anti-dumping investigation, there will be great resistance to the growth of net exports of copper tube. Cautious optimism is therefore needed about future copper semis export from China.

5. Future Development - Enlarging Domestic Demand and Target Positioning

Trade protection and insufficient foreign demand mean that China’s copper semis market will rely on domestic demand over the next 3 years.

A series of domestic demand enlarging policies previously published by the government were indeed effective, especially the “home appliances to the countryside” campaign which has directly promoted the final consumption of copper semis such as copper tube, copper plate&strip&sheet and copper wire.

The results of the “home appliances to the countryside” campaign show that in the first 6 months of 2009, home appliance sales experienced a continuous growth with sales totaling at RMB16.23 billion, of which the RMB5.48 billion in June accounted for a large share. In September, 3.16 million units of home appliance worth RMB6.18 billion were sold. In ad-dition, fridges were the most favored campaign semis in September, accounting for 38.28% of total sales. However, due to lack of sustainable buying force in this campaign, sales volume and turnover has been declining month by month since July.

Nevertheless, the campaign realized about 40,000 tons of final consumption between Jan.-Sept., and in 10-15 years time, this is expected to become the main source of copper recycling.“Household appliances to the countryside” is considered an important part of “enlarging domestic demands” because in contrast to infrastructure investment including grid upgrading,the “Household Appliance to the Countryside”policy, which also includes vehicles and solarenergy heaters, can directly push final consumption growth of copper. In addition, the development of light industries is closely related to copper consumption. In line with the Antaike copper content based copper product consuming structure, light industrial products accounted for about 20% of national total, of which home appliance took 15%. The outlook of this industry is still promising.

A related forecast shows that the average annual growth rate of light industries will be around 10% over the next three years. In the second half of 2009, there will be a total capacity of 11 million units of air-conditioners, including 1.36 million VF units and 9.64 million CF units. Meanwhile, we can gradually see the benefits of promoting energy-saving products.According to the Beijing Zhongyikang Times Market Research forecast, by 2012, the domestic air-conditioner market will total approximately 29.57 million units, of which only 2.41 million units will be low-efficiency CF airconditioners. In contrast, over 10 million units of energy-efficient VF air-conditioner will be sold in addition to 17.16 million unit of energyefficient CF air-conditioner.

We believe that further policy support to stimulating domestic demand enlarging will benefit copper semis consumption, thereby boosting copper consumption. Recent research by Antaike reveals the metal content in major sectors as follows - 40.9% in the power sector, 20.6%in light industry, 16.8% in transportation, 6.7%in electronics and information, 6.6% in construction and 8.4% in others.

As the overall situation remains good, we remain optimistic about the future of copper products.

In summary, “satisfying domestic demand and serving the global market” is not only a target of industrial development in the long run but is also the direction for the development of the copper and copper product industries in near future.