By staff reporter Yan Jiangning

From Caijing Magazine

Southern China’s Yunnan Province plans to boost local refined metals producers by stockpiling 1 million tons of aluminum, copper and other base metals.

But some analysts have questioned the strategic commodities initiative and a similar effort launched by the central government in recent months.

The Yunnan plan, announced in December, calls for building reserves over the next 13 months to create a stockpile of 300,000 tons of aluminum, 100,000 tons of tin, 300,000 tons of zinc, 150,000 tons of lead, and 150,000 tons of copper.

The provincial government agreed to buy the metals at prices above spot market offers: 110,000 yuan per ton of tin, 11,000 yuan per ton of aluminum, 10,000 yuan per ton of zinc, 10,000 yuan per ton of lead, and 28,000 yuan per ton of copper.

Zhang Wancong, director of securities investment department of Yunnan Copper Co., said the government’s effort is aimed at restoring market confidence in the nonferrous metals sector. And good effects were quickly felt.

“The current, slight revival for nonferrous metal prices is related to the government’s policy,” said Zhang.

Yunnan’s decision followed a similar plan announced by the central government’s State Reserve Bureau. The bureau said it would buy 290,000 tons of aluminum at 12,350 yuan per ton from selected smelters – a price 10 percent above market prices – in a move to buoy the sector.

Market rumors were heard in mid-January that the bureau might buy another 59,000 tons of refined zinc from seven, state-owned companies at 11,800 yuan per ton, about 3.5 percent higher than the market price.

The measures underscored government ambitions to push prices higher and support metals firms as the commodities market softens. But questions emerged over timing and whether the policies would indeed revive the sector.

Reserve Plan

Unlike the state bureau’s direct purchase policy, the Yunnan government adopted an alternative method to help smelters. According to Shang Fushan, deputy chairman of the China Nonferrous Metal Association, Yunnan offered to let metal firms use the reserve quota as collateral for bank loans.

At the same time, Yunnan decided to subsidize storage costs as well as make interest payments for companies that get bank loans collateralized by reserves held by the companies or held a government stockpile agency.

A first phase for Yunnan’s reserve plan was announced in early December, covering 180,000 tons of aluminum, 30,000 tons of tin, 236,000 tons of zinc, 104,000 tons of lead, and 2,000 tons of copper.

Nine local producers including Yunnan Aluminum, Yunnan Tin, Yunnan Copper, Yunnan Luoping Zinc and Chihong Zinc, were invited to participate. But the companies reacted with caution.

Yunnan Aluminum, the province’s largest aluminum smelter, was granted a reserve quota of 150,000 tons. But so far the company has set aside only 20,000 tons.

Yunnan Tin Group, the world’s largest tin producer, reserved 6,000 tons after getting a quota of 30,000 tons from the government. And Yunnan Copper said it planned to hold 2,000 tons in reserve, far short of the government’s planned 100,000 tons.

“There’s currently no serious problem for copper demand, so companies don’t want to put too much in reserve,” said Zhang Wancong of Yunnan Copper. “If sales remain normal, it will be unnecessary to increase reserves.”

Li Xia from Yunnan Tin told Caijing the company plans to hold 6,000 tons in reserve and apply for about 660 million yuan in loans based on the government’s price. The company would decide later whether to boost reserves in the future, depending on the market conditions.

Caijing learned that, under the reserve scheme, a company must first sign a reserve contract with the government to hold metals under government guidance. Afterward, enterprises can apply for equivalent bank loans, using a reserve as collateral.

A source at Yunnan Aluminum told Caijing that since the government is not directly buying the reserve, companies face potential risks from market fluctuations. “If prices rebound while metals are in reserve, companies could sell them,” the source said. “But what if prices continue to drop?”

Moreover, if the market improves, a company could be hampered by a slow government process if it seeks to terminate a collateral contract.

Big Bailout

On the day Yunnan announced the reserve plan, copper prices started rising on the Shanghai Futures Exchange. The price had climbed about 14 percent to 26,390 yuan per ton by January 15.

Yet some analysts called the plan too ambitious. Guojin Securities said the reserve would equal 40 percent of the province’s nonferrous metal production in 2007.

The target 150,000 tons of copper is about half of Yunnan Copper’s annual production, while the goal of 300,000 tons of aluminum equals 75 percent of Yunnan Aluminum’s yearly output. The tin quota is 1.25 times province’s 2007 production volume, and 28 percent of that year’s global production.

Yunnan Tin’s Li told Caijing that the reserve plan’s first phase quota of 30,000 tons “is okay for us.” That would equal 52 percent of the company’s 2008 output. “But we are unable to fulfill the entire (plan’s) amount of 100,000 tons.”

Meanwhile, some metal firms with reserves under government guidance are hesitant to apply for bank loans.

Peng Bo, an analyst at Pingan Securities, said if Yunnan Tin gets a 3 billion yuan bank loan based on a 30,000 ton reserve, the company’s asset-liability ratio will rise to 60 percent, putting a heavier burden on the company.

Xia Zhimin, the provincial official in charge of the reserve, told Caijing the plan would be implemented step-by-step until targets are reached.

Analysts say the reserve may affect the market. Peng said annual global consumption of tin is around 350,000 tons, while China’s share is about 130,000 tons. A government reserve of 30,000 tons of tin could have a short-term effect on the market, he said, since that amount equals 9 percent of the global supply and 25 percent of the domestic supply.

The State Reserve Bureau also has critics. One senior industry analyst accused the plan’s authors of trying to buoy a few state-owned companies at the expense of other market players.

The bureau’s aluminum announcement in December said 50 percent of the purchase amount would come from China Aluminum Corp. at a price 10 percent above the current spot price.

Xiao Jing, an analyst at Capital Futures Co., told Caijing he thinks it’s reasonable for China to increase its strategic nonferrous metal reserve. But he said the process should be conducted through a public tender rather than via policy order.

One aluminum industry expert, Wang Feihong, said the State Reserve’s purchase has already had an effect on the market.

“Although a reserve of 290,000 tons is not huge, recent production cuts lowered China’s aluminum production to 900,000 tons in January,” Wang said. “That means about one-third of production has been reserved. The supply drop will impact the market substantially in the short term.”

Wang added that, “Amid the financial crisis and global economic slowdown, the government can hardly change the distressed market situation by simply increasing reserves.”

According to Capital’s Xiao, the major challenge for the global nonferrous sector in 2009 is oversupply. But the government reserve will be unable to absorb the huge global oversupply.

Xiao suggested the government use current market conditions as an opportunity to cut production and get rid of outmoded technology. He said that would be a more efficient way to boost the market and help companies.

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