SHANGHAI, Feb. 5 (SMM) – China’s nonferrous metals industry saw decreasing profits despite the growing income in 2012. Although investment growth in nonferrous metals industry averaged 32.7% a year during the 11th Five-Year Plan period, producing a 29.4% average increase in revenues, profit only grew 18.2%, well below the input. According to the China Nonferrous Metals Industry Association (CNIA), nonferrous metals smelters, among other lead-related segments, staged the largest decline in profit margins.

Net profits of listed nonferrous metals enterprises dropped drastically YoY in 2012, with several of them reporting a slump of 50% in profits. Many companies attribute the decline to low prices for products.
　　
Nonferrous metals prices fell significantly throughout 2012. SMM data show that average price of #1 refined copper was RMB 57,233.6/mt in 2012, that of A00 aluminum ingots was RMB 15,617.12/mt, #1 lead prices averaged RMB 15,290.74/mt, while #0 zinc prices averaged RMB 15,007.61/mt, down 13.62%, 7.35%, 6.35%, and 11.12%, respectively from 2011’s level.
　　
According to sub-indexes of China January manufacturing PMI, input price index was higher than ex-works price index, which may further narrow enterprises’ profit margin, meaning enterprises may possibly see lower profits although their revenues are on the rise.

Depression Across the Industry - Increasing Amount of Downstream Enterprises Halt Production
With the Chinese New Year holiday approaching, an increasing number of downstream enterprises halted production. However, goods supply was still rising, leading to higher inventories.

Copper:
Downstream demand has been weakening during January. Orders at copper semis enterprises continued to fall in January as downstream enterprises were in tight cash flow with loans due for repayments. As such, operating rates at copper semis enterprises dropped across the board. The average operating rate at wire and cable producers fell to 73.31% in December 2012, and the rate at copper wire rod producers was 64.66% in January, down as much as 6.79% from the previous month. Meanwhile, copper smelters ramped up production in late 2012 to achieve output target, but copper demand lagged behind supplies, driving up inventories. As of January 11, SHFE copper inventories rose to 209,000 mt, while inventories in bonded area hit 800,000 mt. On January 16, LME copper inventories also increased to 349,000 mt, the highest level in a year.
　　
Aluminum:
The recovery in property market and growing construction projects in December and January only inspired aluminum semis producers to consume existing inventories, with new orders remaining sparse. Orders for aluminum processors in Zhejiang province were reported down in December, and operating rate at these producers averaged some 70%. An estimated 50% of aluminum plate, sheet, strip, and foil producers should see fewer orders in January, 30% report orders flat at December’s level, with only 20% expected to report increase in orders. Construction projects, and automobile and home appliance producers will all slow their progress ahead of the holiday, curtailing demand for aluminum semis. As a result, many aluminum processors closed for holiday prematurely this year. 
　　
Lead & Zinc:
China’s lead-acid battery industry is still experiencing consolidation, with inventories at battery producers high, so lead consumption downstream remained soft, driving SHFE lead inventories to hit new highs. SHFE lead inventories surged to 99,486 mt as of January 11. On the other hand, steel mills raised prices for galvanized sheet by RMB 50-100/mt in January, but downstream enterprises considered the prices unacceptably high and rarely purchased. Galvanized sheet demand from infrastructure projects was not pronounced so far, combined with cold weather which impeded construction, zinc consumption remained weak.
　　
Profits Down
Data from the CNIA show that China’s nonferrous metals industry realized RMB 147.5 billion in profits during the first ten months last year, down 16.2% YoY, with the decline slowing 3.4 percentage points from that through the first nine months. Profit margin for major businesses was 3.98%, down 1.39 percentage points from a year earlier. Profit margin of smelting and processing segment was 2.78%, falling 1.3 percentage points, leaving 19.2% of enterprises in losses with the total loss at these enterprises growing 1.5 folds YoY. Profit generated from mining segment fell 1.8% to RMB 57.3 billion, and from smelting and processing segment was down 23.4% to RMB 90.2 billion.

Orders Poor
A survey indicates that over 60% of enterprises in nonferrous metals industry reflected their orders were below normal levels. Wistrategy Consulting recently released their forecast for the 2012 results of 300 listed companies in China, noting that 24 companies in nonferrous metals industry are expected to have realized a 12.52% growth in operating income in 2012, but their net profit may present a 22% decline, compared with a 35.04% income growth and 46.83% profit increase reported by the same companies in 2011. This will be the first time that China’s nonferrous metals industry sees decline in net profits during the past four years.
　　
According to a lead and zinc company in Yunnan province, only two of its four lead and zinc production lines were operating, and its silicon metal production line has been shut for over a month. The company suffered a loss of over RMB 10 million given the persistently high inventories, the depressed demand and the low prices.

Many other lead and zinc producers were in the same situation and were thus forced to halt production.

Hidden Danger in Economic Data
China’s economy bottomed out in 4Q 2012 with the GDP growth advancing 0.5 percentage point from 3Q to 7.9%. However, sub-indexes revealed some potential concerns. Growth in fixed-asset investment slowed 0.6 percentage point in December. Of them, investment in property sector grew a mere 12% YoY, compared with a 30% growth earlier. Infrastructure investment growth also dropped to 15%, contracting by half from October’s 30%. Besides, the increase in manufacturing investment slipped to 16%, compared with the 27% average growth in 2010-2011. The slower investment growth should be a result of weakening stimulus from the central government.

Uncertainties in Policies
Monetary easing, especially the Federal Reserve’s easing policy, is the precondition for price increase. However, the Fed stated in December that it may withdraw the asset purchase program in 2013.

In addition, China’s CPI rebounded to 2.5% in December, well above expectation. Although this is partially due to the surge in food prices caused by seasonal factor, the inflation pressure will likely increase. Meanwhile, with home prices rising rapidly, the control over property sector may be tougher. In this context, China’s government may tighten its monetary policies prematurely in 2013.

Reasons Resulting in Lower Profits – CNIA
The CNIA attributes the decline in profits of nonferrous metals industry, particularly losses suffered by aluminum and lead & zinc producers, to three major reasons. First, the industry saw server overcapacity. Second, proportion of self-produced raw materials and energy at enterprises was low. Third, enterprises lacked products of high added-value which left them less competitive in international market.

Direct and indirect reasons:
Direct reason: falling prices for nonferrous metals both in China and abroad
Indirect reasons: rising prices for electricity, energy, and raw materials, higher costs of funds and labor, and a lack of high added value products which kept product prices from rising.

Forecasts　　
Inspired by the easing policies introduced by major economies, nonferrous metals prices in the international market should keep vacillating in 2013, but the average prices may increase from 2012, easing losses at enterprises. Meanwhile, the accelerated infrastructure investment, and implementation of favorable policies for energy-saving products and development plan for emerging industry during the 12th Five Year Plan period, demand for nonferrous metals, high quality products in particular, is expected to increase.
　　
The fixed-asset investment in nonferrous metals industry from January through November last year increased 17.7% YoY, slowing 14.8 percentage points from a year ago. Investment in smelting projects was down 0.5% YoY, while investment in mines and processing operations increased 17.9% and 41.7%. The overall condition of nonferrous metals industry in 2013 is expected to be better than last year.