Non-ferrous metals, exploited as inputs into high-growth areas of the economy, are crucial for China's economic development. The Chinese Academy of Geological Sciences (CAGS) has gone so far as to say that the ability to secure adequate supplies of them impinges upon national security.
Although this might seem something of an exaggeration, China is worried. Despite being one of the largest producers in the world, its proven non-ferrous metal reserves are not rich enough to meet future demand at current rates of economic growth, industrial development and exploitation. Reserves of some metals may not last 20 years. CAGS estimates that China may need an extra 500m tons of copper and 100m tons of aluminum over this period. Without sufficient supplies of non-ferrous metals, economic growth and development could be affected.
Rapidly expanding sectors such as manufacturing and infrastructure, and increased consumerism, are driving current demand for non-ferrous metals. Metals enter the full range of manufactured products, from consumer durables and vehicles to electronic goods and light industrial items. In 2002, China's machine-building industry grew by almost 25 percent, light industry by 18 percent and the electronics sector by 24 percent: all use non-ferrous metals. Government spending on infrastructure has been heavy over the past five years and copper in particular is in great demand, not least because it is essential for expanding electricity generation networks. Demand for copper has been rising by around 12 percent a year.
Domestic production is struggling to keep up, despite expanding rapidly in recent years. In January-October 2002, China's total nonferrous metal output was up 13.4 percent year-on-year to 8m tons.
By metal, the record is mixed (see table). Demand for aluminum has been expanding fast for years, at an annual average of 14-16 percent over the past decade. The metal headed the list by volume and rate of production growth in 2002. Output rose by 28
percent in January-October, to 3.6m tons, amounting to more than 10 percent of global production. Production of alumina, which is used to make aluminum, rose 15 percent in the 10-month period, to 4.5m tons. Alumina imports have been rising fast to feed demand from China's smelters. They grew by 31 percent in January-October, to 3.6m tons, with total imports for the full year 2002 expected to be double the volume in 2000.
China is a net exporter of aluminum; it feeds demand at home and offloads excess on the international market. However, it will have to make up growing projected shortfalls of non-ferrous metals by sourcing increasing volumes from overseas. Imports are already building. The 12m tons imported in January-September 2002 was 16 percent more than in the same period of 2001, continuing a long-term trend of rising purchases. By volume, China imported 2m tons more than it exported for the nine months.
Some 8.8m tons of raw non-ferrous metals were brought in, representing a year-on-year climb of 9.1 percent. Concentrate imports were up 5.6 percent, reaching almost 2.9m tons. Alloy imports rose 10.1 percent, to 395,100 tons. Imports of metals processing materials climbed 22.5 percent, to 1.1m tons. A total of 938,000 tons of refined copper was imported, up 80 percent on 2001. Refined lead and zinc imports also soared, rising 112 percent and 163 percent respectively in the nine-month period.
China is especially short of copper, which it buys in large quantities from many sources, including Australia, Chile, Kazakhstan and the Philippines. It now consumes more copper than the US. By 2010, it reckons it will also be short of antimony, bauxite (for aluminum manufacture), cobalt, lead, nickel, tin, tungsten and zinc, among other ores.
Chinese metals companies have yet to act decisively to guarantee future supplies. They buy mostly on spot markets, when longer contracts would seem more appropriate. They have entered into few forward-looking agreements, though rare examples include limited contracts with Alcoa and BHP Billiton for aluminum. China Nonferrous Foreign Construction Corporation (CNFC) has a copper mine in Zambia, and may be looking at others closer to home – for example, in Burma and Mongolia. To date, there is only the odd collaborative venture overseas, with the focus on ferrous metals. Baosteel has a joint venture with Rio Tinto in Australia, for example.
China could mitigate its growing dependence on imports with more efficient exploitation of its known reserves and new finds. CAGS says that not enough money is invested in geological surveying. The government spent RMB22.7bn on mineral prospecting in 2001, although non-ferrous metals accounted for only a proportion of this. Many metals companies, however, seem less interested in mining than in processing, suggesting that they will rely more on imports.
Restructuring of China's fragmented non-ferrous metals industry would be one way to raise efficiency. Consolidation is needed at the top end, where there are about 3,500 mining enterprises. There are tens of thousands of smaller operators – low-revenue enterprises, part-time miners, moonlighting farmers – many of which are poorly regulated, inefficiently run and heavily polluting. There are also hundreds of non-ferrous metals smelting and processing plants.
An elite of leading enterprises is only slowly taking shape, although the government is committed to accelerating restructuring in the period up to 2005. The merger of seven companies into China Aluminum Corporation (Chalco) in 2001 created one of the largest aluminum companies in the world. More recently, nine copper companies, including China's largest producer, Jiangxi Copper Industrial Corporation, and the CNFC, joined together in the China Nonferrous Metal International Mining Corporation, a vehicle for buying into or operating mines abroad. The government says it wants each of the major metals industries of copper, aluminum, lead and zinc to be dominated by only a handful of enterprises within the next few years.
Capital is a major constraint for China's metals companies. Mining on a decent scale requires exceptionally large outlays, with money committed for a long period of time. It is not clear that even China's consolidated entities would be able to finance such needs. Nor can they necessarily count on foreign partners. Rio Tinto, for one, is interested in China as a market, but is deterred from investing in local mining operations by the complexity of the environment. In addition, the reform-minded central government is pitted against local governments, which seek to protect revenues and jobs in their jurisdictions. Such conflicts of interest make for considerable uncertainty.
Central government itself appears to be ambivalent about foreign participation, favouring local industry. Restrictions remain, for example, in tungsten and tin, which are among the 52 commodities under export license and quota controls in 2003. Without foreign help, the task of upgrading local industry is made harder.
China lacks advanced technology and expertise, and has little experience in deep mining, which could give access to important new reserves. Pollution is another problem area, and foreign companies could offer cleaner technology and processes.
China also has serious supply-side difficulties. Metals production and markets are distorted. Surpluses of non-ferrous metals, such as magnesium, are offloaded on international markets. The same is particularly true of aluminum, where the industry is afflicted by an irrational expansion of capacity. This now stands at close to 5.5m tons, and could reach 8m tons in 2005 if existing plans are followed through. Supply has been running well ahead of demand. Chalco is sinking RMB9.7bn into the expansion of Shanxi Aluminum Corporation, a major producer of alumina. Export volumes of aluminum products doubled in January-September 2002. Meanwhile, imports continue to rise, even in metals in over-supply at home. China is closing inefficient and polluting mines, cutting productive capacity, at the same time as long-term demand is growing.
Rising international prices also tempt producers to sell to overseas markets rather than at home. By contrast, tariffs are coming down, cutting the price of imports, which are often of higher quality than China can produce. Volume imports of alumina, tariffs on which will more than halve between 2001 and 2004, grew by 83 percent rise between January and September 2002, to 1.1m tons.
China is likely to stay in deficit on the trade account for non-ferrous metals. In the first 10 months of 2002, metals imports were worth US$8.9bn and exports US$4.7bn. Imports rose 11 percent, while exports surged 36 percent. Imports of all-important refined copper expanded 75 percent in January-October to just over 1m tons, against exports of only 61,000 tons.
The government is trying to impose order on the non-ferrous metals industry. But its remedies smack of anti-market intervention: targets are being set and penalties threatened for breaches of new rules on production, capacity and the localisation of mines and plant. What the industry really needs is a thorough shake-out, driven by market forces.
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