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Impact of China’s Macro Economic Situation on the Nonferrous Metals Industry

In 2014, the downward pressure of China’s economy increased, the Central Government insisted on general work keynote of seeking progress in steady growth; guided by improving economic development quality and benefit, it pro-actively adapted to “new normal” in economic development, introduced multiple reform measures, aiming to cope with difficulty of realistic choice in “reducing speed, adjusting structure, and altering momentum” faced by Chinese economy for a number of years.

Judging from fixed asset investment, which is the most important factor, economic growth speed will definitely experience obvious downturn, and enter new normal status. From January to November 2014, national fixed asset investment (excluding agricultural production) is 45106.8 billion yuan, nominal growth is 15.8% on Y-o-Y basis, the growth rare dropped by 0.1 percentage points compared with that of January-October period, whereas the growth of the same period in 2013 reached 19.9%.

By December 31, 2014, the medium price of RMB against USD settled on 6.119, indicating obvious depreciation compared with the same period in 2013. Since the beginning of 2014, RMB exchange rate against USD has dropped by a total of over 2%; at the beginning of the year the market widely expected RMB to top 6 in 2014, this also implies that hope was dashed at the end of the year. However, RMB depreciation mainly has three reasons, firstly the change in US currency policy, secondly the announcement of interest cut by the People’s Bank on November 21, and thirdly that the latest export growth is lower than expectation.

Interest rate is an important factor price. On July 20, 2013, with approval from the State Council, the People’s Bank of China cancelled the lower limit of 0.7 times loan interest rate for financial institutions, instead financial institutions can independently determine loan interest rate level based on commercial principle. Meanwhile, it relaxed control over deposit interest rate in an orderly manner, pushed forward interbank deposit certificate issuing and trading. On September 6, 2013, treasury bond futures trading began. On November 22, 2014, with approval from the State Council, the People’s Bank asymmetrically down tuned RMB loan and deposit benchmark interest rate. Wherein, one-year term loan benchmark interest rate of financial institutions was taken down by 0.4 percentage points to 5.6%, one year term deposit benchmark interest rate was lowered by 0.25 percentage points to 2.75%. Combined measures are taken to push forward interest rate marketization reform, and adjusted the upper limit of the floating range of deposit interest rate in financial institutions from previous 1.1 times to 1.2 times. Meanwhile, before the domestic targeted lowering of the rate of deposit reserve formally kicked off, in particular year-end market capital shortage tension continued, which pushed Shanghai Interbank Offered Rate (Shibor) to soar, an act accomplished by fully taking advantage of marketed mechanism of interest rate.

At the beginning of 2014, the employment target set up by the Central Government is whole year urban new employment of 10 million persons above; however in the first three quarters newly added urban employment was 10.82 million person, which reached the whole-year employment target ahead of schedule; urban unemployment registration rate at the end of third quarter was 4.07%, below 4.6% control target; nationwide resident per capita disposable income actually grew by 8.2%, which exceeded GDP growth speed. Especially in the first three quarters, tertiary industry added value grew by 7.9%, higher than growth speed of GDP and tertiary industry in the same period, this also fully displays the role of service industry in absorbing employment and supporting economic development.

Since 2012, the State Government continued to maintain certain regulation & control measures on the real estate market, this to a certain degree also affected the prosperity of the manufacture industry, and dragged down whole year industrial growth speed.

At the current stage, capacity surplus of the domestic industry, transition and upgrading of industrial structure, and new industrial revolution are profoundly affecting China’s industrialization follow-up progress. The impact of manufacture industry on Chinese economy will also undergo qualitative change in the subsequent industrialization progress. Today the percentage of China’s tertiary industry is merely approaching 50%, which means it is not only unable to become single economic driving power, itself may also be dragged by sluggish industrial development to slow down. Based on international research experience, per capita GDP USD 8000-9000 is the threshold of transition from industrial society to post industrial society. At present China has surpassed this mark, the percentage of added value from industrial sector has begun to decline as a general trend, which seems to be unavoidable.

Domestic industrial structure optimization continued to make progress. In 2013, added value of China’s service industry for the first time surpassed that of secondary industry to become the biggest industry in national economy. In the first three quarters of 2014, the percentage of added value of service industry continued to rise to 46.7%. Furthermore, upgrading of industrial structure fostered new economic growth points, through adjusting existing volume, it optimized increment to boost employment. During the process of industrial upgrading, enterprise M&A and comparative concentration of production are inevitable, the functions of emerging industries, service industry, and small & micro enterprises are highlighted; small-scale trend, smart trend, and professional trend of production will become new features of industrial organization. These new changes must be linked to creating new growth points, meanwhile it is required to better bring out the market’s function, create policy environment and system environment favorable to mass entrepreneurship and market entity innovation.

Since the setup of the new government leadership group, it spared no effort in deepening comprehensive reform, the key target is to enable market mechanism to play decisive role in resource allocation, this involves government ‘Streamlining administration & delegating power’, boost economic transition. Judging from the government’s overall deployment, there still exists too much intervention by government departments; for a long time in the past China’s economy developed market economy dominated by the government. Premier Li Keqiang’s administration vigorously has pushed forward system reform since 2014, through ‘Streamlining administration & delegating power’, it shifted to establishment and improvement of government serviced market system, market order, and market competition mechanism, in order to establish and improve socialist market economic system with uniform development and orderly competition as the focus of a new round of reform. Based on work schedule of the Group for Comprehensively Deepening Reforms of the Central Government, in 2014 the whole nation kicked off about 60 reforms in economic and ecological aspects, including household registration system reform items including central enterprise management salary reform, Shanghai Free Trade Zone reform etc. Based on the central government’s strategic planning on fully deepening reform between 2014 and 2020, among the 336 reform measures being listed, in 2015, 55 items will be completed. Among more than 1,700 administrative approval items, up till now a total of 708 items were cancelled or delegated; now there are about over 900 remaining item that need permissions. In 2015, it is necessary to continue to implement ‘Streamlining administration & delegating power’ measures. Just like what is being hotly discussed today, the magnitude of ‘Streamlining administration & delegating power’ will determine the degree of market vitality.

In summary, against the macro background of “Three Periods Superimposed”, China’s economy is entering a new status; a new industrial structure is now taking shape through optimization; the growth momentum is being nurtured. In 2015, as overseas economic environment stabilizes and improves, dividends of reform are further released, and China’s economy will continue a healthy and steady growth.

From the perspective of nonferrous metals industry, it has the following characteristics:

1. High concentration degree of capacity surplus industry, heavy task of phasing out backward capacity

According to statistics, among 39 industries in China there are 21 industries whose capacity utilization rate is lower than 75%; according to international standard, any industry with capacity utilization rate below 75% is an industry with surplus capacity. However, among these 21 industries, those involving nonferrous metals include five sectors of copper smelting, aluminum smelting, lead smelting, zinc smelting, and poly crystal silicon, which account for nearly 1/4 of capacity surplus industries. In these industries with surplus of nonferrous metals capacity, generally industrial enterprises are not faring well, as profit tumbled, enterprise burden was heavy; meanwhile they are facing multiple pressures from national policies, such as phasing out backward production capacity, improving equipment investment for technological strength, and impact of vicious market competition etc. In contrast with the needs of nonferrous metals industry, there is domestic capacity surplus; meanwhile, real phase-out of backward capacity is an arduous task which still needs a long way to go. Local governments’ protective mindset needs to be further removed, coupled with credit assignment by financial departments for industries with capacity surplus to support enterprise transition and upgrading, and in the end the trend is to absorb surplus capacity, and let the industry return to a market with orderly competition.

2. Low level of prices, enterprises urgently need to improve management standards and reduce costs

Nonferrous metals prices experienced obvious diversification, and many varieties remained at low level. By the end of 2014, domestic aluminum price still remained at the level 18 years ago, for copper price dropped by 13.2% than the beginning of the year, lead price dropped by 15.6% than the beginning of the year; however, zinc and nickel prices demonstrated obvious rising momentum, for zinc price rose by 7.4% than the beginning of the year, nickel price rose by 8.9%. In the aspect of rare metals, tungsten price dropped by 9.4%, molybdenum price dropped by 9.2%, tin price dropped by 1.1%, and antimony price dropped by 5.1%; but the prices of some minority metals rose, for instance indium price rose by 7.5%, bismuth price rose by 34.4%, germanium price rose by 2.1%. Price increase of some metals is mainly caused by heightened asset and arbitrage needs resulting from global easy monetary policy, certain effects due to China’s policy to stimulate consumption, and the rally of market expectation etc. Nickel price rose sharply, it is also affected by factors such as Indonesia’s new policy and sanction of Russia by Western countries. Looking ahead, due to impact of inadequate support from market demand, in 2015 the trend of nonferrous metals prices is not optimistic.

Violent changes and fluctuation of prices also forced nonferrous metal enterprises to confront capital pressure in business operation, and nonferrous metal enterprises urgently need to improve management standards, reduce operation costs, and improve profit-earning ability necessary for enterprise normal development. The current price risk poses a challenge to enterprises, while at the same time it also provides a good opportunity for enterprises to increase income and cut expenditure, tap enterprise’s cost-cut ability from multiple channels and through multiple paths.

3. Nonferrous enterprises must voluntarily adjust business operation to adapt to the new normal in economic development

Currently Chinese economy is experiencing the impact of “Three period superimposed” factor, economic development has entered a new normal, which will surely bring about slow-down of economic growth speed, transition of economic structure and growth pattern, and government regulation & control of macro economy and adjustment in management approach. In the face of such macro environment, nonferrous metals enterprises must be extremely careful in investment decision-making, and production decision-making; it is even possible for a group of enterprises to make decision on changing the line of production based on new market situation. In view of the needs under the new normal, nonferrous metals enterprises all the more should properly arrange survey of market demand, closely monitor upstream and downstream market, for instance aluminum has vast space of demand in transportation, power cable, architectural template, and industrial design, and it requires close connection with downstream, so as to combine force to push forward extensive application of aluminum. Furthermore, domestic new energy battery development will become highlight of the future, and it will become a crucial winning step in enterprise development for new energy battery enterprises can closely track latest technologies at home and abroad and convert them into industrial ability.

4. Innovative technologies improve added value of nonferrous metals products

Judging from existing economic development condition, the demand growth of nonferrous metals market has slowed down, and prices of multiple nonferrous metals varieties will still hover around low level; enterprise performance will differ, with advanced technologies, low cost, and strong market competitiveness, then, enterprises’ performance and product added value will naturally improve. However, when it comes to increasing product added value, it involves innovation technologies, which is the most important factor; it is necessary to enhance multiple scientific and technological productivity factors such as enterprise equipment level, talent, management etc. Therefore, senior executives of nonferrous metals enterprises need to fully recognize the important role of innovation technologies for improving added value of nonferrous metals products, and continually increase investment in scientific and technological productivity.

5. Heavy pressure from environmental protection, enterprises must strengthen construction in improving sense of social responsibility

Nonferrous metals industry generally involves environmental protection problem. As the living standard of Chinese residents continued to rise, government management ability and socialist rule of law awareness continued to improve, nonferrous metals industry is facing tremendous pressure in environmental protection. Against the current background of difficult industry operation, some nonferrous enterprises with weak environmental protection awareness randomly discharge three wastes, for indirectly reducing operation cost of single enterprise, aiming to tide over the difficult time. But such action will bring irreparable damage to the environment, therefore, in view of such condition, it is necessary to further strengthen the construction in improving sense of social responsibility among enterprises, while ensuring production, properly protect the environment; meanwhile, the government must strengthen propaganda of environmental protection and rectification efforts, properly monitor relevant public opinions and handle the construction of supervision system.