China produced 5.2m tons of nonferrous metals last year, the second ghest total after the US. It is also a major consumer, demand being driven by the fast pace of growth of the national economy.
In copper, for example, China's 1996 consumption of 1.6m tonnes was level with Japan and ahead of Germany. Future growth could precipitate world short-ages, experts believe. At a metals conference in Beijing last month, CRU International predicted that China could have a copper concentrate import demand of 600,000 tonnes a year in the next decade ?despite an anticipated five per cent annual growth in its smelting capacity.
As a major metals consumer, it is inevitable that China has become a major player on world metal markets. Yet its role is opaque and unpredictable, to the cost of China's nonferrous metals industry which has suffered from damaging miscalculations on international markets.
Five months ago, the Chinese were facing big losses after misreading the future price direction of the zinc market. One analyst close to the state monopoly CNNC (China National Nonferrous Metals Industry Corporation) says the Chinese under-estimated the size and risks of playing the world market. "They believed they were on a big lake and they didn't realise it was a huge sea ?that is to say the international market," he says.
The shock came in July when it was revealed that Zhuzhou Smelter, a Chinese zinc producer, would have to buy zinc on the open market to cover short positions taken earlier in the year when the international price was at the relatively low level of US$1,100 a ton. Zhuzhou had sold over 200,000 tons of the metal in forward contracts, expecting to buy it back in September at a lower price and thereby make a profit on the transaction. But by the middle of the summer, the price of zinc was heading to-wards US$1,600. Chinese smelters have been struggling during subsequent months to meet the contracts and cover their losses, being forced to call for sup-port from CNNC and central government reserves.
The impact of the 'zinc mistake' as it has become labelled is having far-reaching consequences on the state-owned metals sector at a time when China's swift economic growth is fuelling strong demand for mineral resources. Estimates differ but it is widely believed that rising domestic output will not be able to match the country's growing consumption ?especially for iron and copper. China's shortage of iron ore is estimated to reach 100m tonnes a year by 2000 while the shortfall in copper is expected to grow despite recent discoveries of large copper deposits in Xinjiang, Fujian and Yunnan.
To plug the gap, China has started to develop iron and copper resources pro-grammes in Australia, Africa and Latin America. In 1992, for example, it bought the Hierro Peru iron mine for US$120m. Given financial strength derived from its import and export business ?worth US$1.88bn in 1996 of which US$1.14bn came from exports ?CNNC has been trying to forge overseas partnerships. Last year the corporation undertook six foreign technological co-operation projects and 10 projects involving governmental economic co-operation.
Meanwhile, the shake-out of the largely inefficient state-owned metals sector has become a priority. But the reform process is likely to be slow because of the sector's importance to millions of workers. "In Western countries, when a company accumulates losses it can lay off its workers, but in China it is not easy to take away the worker's labour rights," explains an analyst at CNNC. The huge corporation comes directly under the State Council and is headed by Wu Jianchang, a son-in-law of the late paramount leader Deng Xiaoping. It achieved profits of more than US$1.4bn last year and contributed half of the country's nonferrous metal output.
CNNC's programme of restructuring was given the go-ahead by the State Council when the corporation became one of the three pilot state-holding companies deter mined at a national conference in November 1994. The merging of some companies into a trading group went ahead and five companies were listed on the A-share market, helping to raise over US$60m.
Jiangxi Copper, China's biggest copper producer, was granted permission to list in Hong Kong. But behind these apparently positive developments, much of the industry is in a sickly state. Some analysts estimate that 20 per cent of China's lead, zinc and aluminium production is uneconomic and these companies there fore struggle to provide the housing and welfare needs of their workers and families. There are an estimated 1,400 Chinese factories producing copper and aluminium, most of which are small units operating in the red.
CNNC has been decentralising its operations for some time it claims to retain tight control of only 40 per cent of the industry. For copper production the ratio is 60 per cent, but as one analyst explained "every company enjoys its own autonomy, with the authority to import and export and also to engage in limited foreign trade".
Industrial restructuring, mergers and acquisitions have been encouraged by the 15th Party Congress. Yet CNNC will be reluctant to cede further control of the metals industry because of the management problems which emerged during the reform process. "Some Planning Commission, as saying US$5.4bn of investment would be injected into the industry over the 1996-2000 period to increase supplies of copper oxides and refined aluminium.
The China factor
The uncertainty of the 'China factor' is set to persist on the international markets. It is difficult to predict China's next move in the metals industry. The main question concerns copper China is thought to need to buy large amounts of the metal on the international market to satisfy a growing domestic demand but it has not placed any big orders recently. "Domes-tic production of copper metal is not ideal and the quality of the product is relatively low. That is why I think there will continue to be certain amounts of copper imports," concedes the analyst at CNNC. The official Chinese explanation is that slack domestic demand is the cause of reduced international purchases. However, the CNNC analysts states that import activity has more to do with the state of the market than with domestic demand: "It is only when the domestic price is much higher than the London Metals Exchange price that imports can bring profits, and that is not linked to consumption."
International analysts have long speculated that CNNC is waiting for lower prices at LME, yet some Chinese traders would appear to have been speculating on higher prices in 1998. All this has added to the air of confusion, confirming the impression that China is learning the hard way to find its way: "We have to clarify our place on the international market and we shouldn't exaggerate it, thinking we can control market prices," says the analyst.
Recent initiatives, however, could strengthen CNNC's influence on world markets. Realising the need to take greater control of trading activities, the corporation last month opened two trading centres, one for lead and zinc and the other for copper. The copper trading centre will centralise the hedging activities of Chinese smelters and mines on the London Metals Exchange. The lead and zinc centre will co-ordinate long-term contracts between CNNC-controlled companies and foreign parties and it will also centralise foreign trading of lead and zinc concentrates. Major members of the centre include Zhuzhou Smelter, which caused so much turmoil earlier this year.
More bad news is expected while these changes are taking place. According to the official magazine China Metals, CNNC was badly affected last year by the collapse of copper prices related to the Sumitomo affair and lost nearly US$116m in the first five months of this year because of depressed prices of metals such as cop-per and aluminium. The slump has been caused by tight monetary policy, lower demand and relatively high stocks. Most analysts expect prices of aluminium and copper to continue to fall in the remain-der of this year and CNNC might find it difficult to cut its losses. Aware of the situation, the Chinese government has stepped up its investment programme in the industry. The official Xinhua news agency quoted Chen Dajiang, director of the nonferrous metals section of the State analysts realised as early as February that there was something wrong with the zinc market, but it was impossible to correct it in time because of a problem of feedback," says a CNNC source. Reacting to the set-back, CCNC is stepping up its control of company activities, especially future de-livery contracts, by centralising trading operations. Some management restructuring is also rumoured.