Brief Analysis on Chinese Metal Mining Industry Situation in 2020 and Prospect for 2021

In 2020, Chinese economy recovered rapidly after the overcoming of COVID – 19, and this made China the only country in the world that achieved positive economic growth annually and mobilized global economic recovery. From the perspective of metal mining industry, a shape has formed that the world (supplying side) counts on China (demanding side). In future, relying on China’s new pattern of economic development of “giving priority to domestic big circulation”, China is gradually changing supplying pattern of global metal mining industry.

1. In 2020, global metal mining industry created new high after the trend of “l(fā)ow at the beginning and then climbing high”

At the beginning of 2020, the outbreak of COVID – 19 brought a hard brake on global economy and economy regressed so globally that there was no escape. A downturn began in metal mining industry. According to data released by MINING.COM, an authoritative media in Australia, top 50 global listed mining companies decreased by about 30% in market value, just a bit higher than USD 70 million, the lowest point in the past 4 years. After the first quarter, China relied on its unique anti-epidemic measures to take the lead in breaking through the epidemic. China also mobilized the development in global metal mining industry on its own by consuming over a half of metal volume globally. In addition, all countries released quantitative easing monetary policies to fight against epidemic. As of the third quarter in 2020, top 50 listed mining companies had surpassed USD 1 trillion and climbed new high.

Natural resources distribute unevenly on earth so conventional resource-rich countries are still in a dominant position. Australia, Canada, USA and Russia account for 70% of total market value. Among them, Australia itself accounts for 30% of total market value.

15 companies in the world are on the list where Newmont is highly ranked, the 4th on the market value list for global listed companies. Mining companies that are engaged in polymetallic ore exploring and operation have obvious superiority, i.e. they have greater anti-risk capabilities than single mineral companies. Among top 50 mining companies, 9 companies are engaged in polymetallic ore exploring and there market value account for over 40% of total market value.

From the perspective of main products of listed companies, companies that center on iron ore, copper and gold have made outstanding performance. Elements such as COVID - 19 outbreak, hostility between China and USA and geopolitical crises that cause uncertainties in economic development all impel the world to regard gold as the first choice for haven currency.

From the perspective of company market value, we see a typical oligopolistic market in metal mining industry, such as BHP Billiton and Rio Tinto Group, the absolute leaders, BHP Billiton, in particular. If the market value of its subsidiary, SOUTH32, is included, BHP Billiton’s total market value achieved USD 136.5 billion as of the end of Q3, exceeding the second place, Rio Tinto Group, by USD 26.9 billion. That is to say, the sum of Rio Tinto Group (the second place) and GLENCORE (the 11th place). What’s more, the sum of BHP Billiton’s market value and Rio Tinto Group’s market value account for almost 25% of total market value of all top 50 listed mining companies. Besides, another two traditional international mining giants, Vale of Brazil and Anglo American, also made outstanding performance. If the market value of all subsidiaries of Anglo American are included, its comprehensive market value exceeded USD 71 billion, ranking the 3rd, followed by Vale of Brazil as the 4th at USD 54 billion. The market value of the four companies account for over 36% of total market value.

In the meantime, with the contribution that China have yielded more and more crude steel, the four global iron ore giants, BHP Billiton, Rio Tinto Group, Vale of Brazil and FMG, and traditional iron ore giant, Anglo American have all made their ways to top 10, generating total market value of USD 407.1 billion, accounting for almost 40%. The sum of EBITDA of BHP Billiton and FMG in 2020 fiscal year (by June, 30, 2020) achieved USD 30.5 billion, exceeding total profit of Chinese steel industry in the same period. As for BHP Billiton, its EBITDA is USD 22.1 billion, its operating profit is USD 14.4 billion, and current profit margin is 53%. Its iron ore business contributed EBITDA of USD 14.55 billion, presenting a YOY growth of USD 3400 million, accounting for 2/3 of BHP Billiton’s total EBITDA. In the same period, FMG released its financial report which claimed that its EBITDA is USD 8400 million, presenting YOY growth of 38％. EBITDA profit rate is 65%.

2. Industrial profit rate of Chinese metal mining industry is still lower than that of industrial companies of scale economy

In 2020, global economy was stagnant and even regressed due to the shock forced by epidemic. Chinese metal mining industry has been well playing the role of rescuing national economy after this epidemic and gave great support to our country in being the first to conquer COVID – 19. China is the only country in the world to achieve positive economic growth in 2020, contributing to the shape that China became the decision maker country in metal mining industry.

From January to October, 2020, metal mining industry achieved operating income of RMB 107641.6 trillion, presenting a YOY decrease of 2.8%. Among it, ferrous metal industry achieved operating income of RMB 6142.62 billion, presenting a YOY decrease of 0.8%, accounting for 57%; non-ferrous metal industry achieved operating income of RMB 4621.54 billion, presenting a YOY decrease of 5.2%, accounting for 43%.

In the same period, metal mining industry achieved profit of RMB 341.33 billion, presenting a YOY decrease of 13.8% and industrial average rate of profit of 3.2%. Among it, ferrous metal industry achieved profit of RMB 213.89 billion, presenting a YOY decrease of 17.1%, accounting for 63%, and presenting industrial average rate of profit of 3.5%; non-ferrous metal industry achieved profit of RMB 127.44 billion, presenting a YOY decrease of 7.5%, accounting for 37%, and presenting industrial average rate of profit of 2.8%.

From the perspective of industrial development as a whole, average profit level of Chinese metal mining industry is still lower than annual average profit level of industrial companies above designated size. Operating income of metal mining industry exceeds one trillion, conversely, its profit is at a rather low level. Tied down by the fact that China relies on foreign countries for raw materials, Chinese metal mining industry suffers weak earning power, which does not conform to China’s position as the biggest metal mining resource consumer country globally, especially when we talk about steel industry.

3. In 2020 in China, ferrous metals market grew fast and non-ferrous metals market showed fall-rise pattern

From the perspective of industrial segmentation, Chinese steel industry, mobilized by robust domestic demands, outperformed non-ferrous industry. To be more specific, as of December, 4, 2020, the price of China’s five types of steel products went up by 10-15% in average. Iron ore, mobilized by the robust yield of crude steel, became the most representative metal ore, presenting annual increase of 110%; nickel metal, mobilized by Chinese stainless steel industry, continued to play the most active role in China among six base metals. Conversely, manganese and chrome market were relatively depressed due to excess supply. Manganese price was like a flash in the pan in Q2 of 2020 because of the misallocation between supply and demand caused by seclusion of South Africa to prevent epidemic spreading. The rest of time, manganese price remained average in performance. Chrome price, far from satisfactory, was at a relatively low level in the whole year.

Speaking of non-ferrous base metal, the outbreak of Covid-19 in 2020 hindered the supply of non-ferrous resources from Peru, Chile and South Africa. On the other hand, China, a country that accounts for over a half of global non-ferrous consumption, well prevented consumption end from falling greatly, thus causing short-term misallocation between supply and demand. To be more specific, according to estimation, annual gap in copper volume, zinc volume, lead volume and tin volume are respectively 1000000 tons, 500000 tons, 40000 tons and 20000 tons. There is going to be 70000 tons of surplus in the supply of nickel metal. Driven by this element, non-ferrous market presented a fall-rise pattern and the price of non-ferrous metals (represented by copper) went up after July, 2020. According to the price data as of December, 4, 2020 in LME, increase in comparison of high and low values of copper price in the year is 69%, that of aluminum price is 41%, that of lead price is 32%, that of zinc price is 55%, that of nickel price is 54% and that of tin price is 44%.

With respect to battery material metal, activated by positive epidemic prevention and control and favorable policies, Chinese auto industry started to play “chasing” games in second half of year. According to data released by China Automotive Industry Association, decline in auto cumulative production and sales in domestic market from January to November, 2020 was narrowed to within 3%. All year round, decline in auto cumulative production and sales is going to be narrowed to within 2% and sales volume is expected to exceed 25 million vehicles. As the auto market is recovering, cumulative sales of NEV turned positive for the first time, which further became a big contributor to auto market recovery. It also acted as a stimulus for price of battery material metal (lithium as the representative) to go up.

Beside COVID - 19 outbreak, turbulent geopolitics battles in Middle East, West Asia and part of African areas such as Nagorno-Karabakh conflicts, civil war in Syria and unrest in Ethiopia get intensified. These elements acted as a stimulus for demand for military rare metals such as rare earth resources to stay vigorous. Conversely, demand for Chinese traditional advantageous minor metals such as antimony and tungsten is relatively weak over the whole year due to Fanya-event-caused inventory, particularly the price of ammonium paratungstate (APT).

Precious metals such as gold became very popular and the pioneer of the industry for some safe-haven capital because of epidemic spreading, turbulent geopolitics battle, hostility between China and USA and US Presidential Election. Its extreme price difference in the year is 30%. In 2021, gold, as a safe haven currency, its price will still remain as high as USD 1800/ounce, activated by ever-increasing safe haven desires of the market.

4. An overall optimistic trend for metal mining industry in 2021.

From the perspective of global development, the whole globe has gained significant control on COVID - 19 outbreak and the vaccine research enjoys favorable prospect, metal mining industry has high expectations for future recovery of global economy. Metal mining industry will continue to experience growth. Specific industrial segmentations are as follows:

(1) Ferrous metals will perform in a more robust way than non-ferrous. Driven by the new economic development pattern of “giving priority to domestic big circulation” in China, expectation on demand for steel is optimistic. Yield of crude steel in China will retain the situation of 2020 and even climb higher. But the price of steel is not very likely to climb higher because of low acceptability in downstream end. The price of iron ore, principal raw material for steel production, will fall with small oscillations “accordingly” because most prospective energy of motion has been consumed in advance in 2020 and the industry has paid too much “attention” to it.

(2) The prices of non-ferrous base metals (represented by copper) have rushed to the high point over the years. After the globe has well controlled epidemic spreading, major metal producing countries will release abundant metal yield so this will soon remedy gap of supply and demand in base metal market. Consuming end of base metal market in 2021 does not present much growth compared to that before epidemic spreading. Therefore, the gap caused by misallocation between supply and demand will soon be remedied. Supply and demand trend will tend to reach a balance or a weak balance, i.e. oversupply. So we can estimate that imbalance between supply and demand will be settled in non-ferrous industry and the price is like to fall.

(3) Chinese traditional advantageous minor metals such as antimony and tungsten digested Fanya-event-caused inventory, so in 2021, supply side will ease, which will be good for overall supply and demand of the market. Therefore, we have reasons to believe that non-ferrous minor metals will outperform base metals.

(4) Elements like geopolitical risk and Sino-US trade friction after election will still make global safe haven capitals continue to regard precious metals like gold as their first choice for investment. This will help to keep the price of precious metals (represented by gold) at a high level. In 2021, precious metals like gold will likely to remain high.

(5) Demands for military metals will remain robust if situations like geopolitical risk and superpower games continue. Demands for rare metals like titanium and rare earth remain robust, and this is optimistic for the whole market. Battery materials market such as lithium will get mobilized thanks to increasing demands from downstream market. Ternary battery material field, where China makes great performance, is going to usher in a vigorous season for yield. Balanced supply and demand situation in battery material field will retain the same as that before epidemic spreading and it will mobilize the price of battery material metals (represented by lithium and nickel). On the other hand, the price of cobalt metal will get repressed for the reasons that Glencore (supply end) imposes strict control on spot market and demand end implements “de-cobalt” process.

5. Uncertainties in metal mining market keep rising in 2021

Despite positive anticipation for 2021, uncertainties and risks in the market are still running high due to reasons including repeated epidemic outbreaks, numbers of quantitative easing monetary policies around the world in 2020 and abundance of capital. In 2021, in the circumstance of concerns about where the capital goes, ups and downs are likely to continue in metal mining industry.

First of all, the comeback of epidemic will severely impact the expectation for vaccine research achievements, which will further lead to a fall and even recession of global economy. As a result, more countries including major resource countries will hinder the recovery of metal mining industry because of national populism, anti-globalization and trading sentiments.

Secondly, after presidential election, Sino-US trade friction is likely to continue or get even worse. Strategic alliance of interests formed by some western developed countries (led by USA) will carry out policies against China, and certain regions and countries still suffer geopolitical crises. All these elements will influence China and will further influence supply and demand balance in global metal mining market, thus leading to ups and downs.

Thirdly, China is the only psychological sustenance in the world for global metal mining industry in terms of demands. At present, concerns always exist in this industry whether copper and iron products have consumed, in 2020, the demands for 2021 in advance. Once China’s demands turn weak and epidemic spreading is curbed effectively, YOY great increase in actual yield will generate a big impact to metal mining industry. Copper market is faced with the biggest risk so far.

Fourthly, China adopts the new economic development pattern of “giving priority to domestic big circulation”, which will re-shape supply and demand structure of metal mining industry. Our facilitating the recycling of domestic renewable technology resources will make overseas mining manufacturers pretty much upset. As a response, international mining giants are sure to jointly fight back and as a result, another industrial reshuffle will occur, such as China’s another launching of scrap steel import. Based on this, we estimate that our imported iron ore market is faced with the biggest risk.

Fifthly, metal mining products are given more and more financial nature. Hot money generated under quantitative easing policies flow to financial market, so risks in financial market are likely to shift to spot market. This will lead to price ups and downs in spot market. Safe haven means should be prepared in advance in related financial market and emergency plans should be well exercised in advance.