[SMM Special] China Ferrous Metals Market in the Shadow of Spreading COVID

SHANGHAI, Apr 25 (SMM) - Below is a detailed look into how the current wave of COVID that spreads extensively in China is impacting the country’s manufacturing sector. We try to be as detailed as possible to guide you through the complexion.

1. Copper

Operating rates of copper billet plants were less than expected in March due to the COVID-19

The severe pandemic in Ningbo greatly affected the production and sales of large copper billet producers. Goods in these plants could not be shipped to Shanghai, Jiangsu and some other places. In addition, the pandemic suppressed the terminal demand, such as the automobiles, hardware fittings, sanitary ware and real estate, which further reduced the orders of copper billet. According to industry reports, orders in March dropped by about 20%-30% compared with the normal level, and some even recorded a loss of 50%.

Operating rates of secondary copper rods were less than expected due to the problems concerning shipment and raw material procurement

In March, the pandemic prevention and control measures got stricter, resulting in a decline in operating rates. On one hand, the finished products of secondary copper rod producers could not be shipped. On the other hand, the supply and transportation of raw materials became more difficult. Orders of secondary copper rods have been moderate in April. However, due to the shortage of raw materials, producers have been unable to produce more. SMM expects that the operating rates of secondary copper rod producers will reach the bottom in April. The plants are unlikely to further reduce their production, on the contrary, their willingness to resume production will increase.

The number of copper rod enterprises in Jiangsu, Zhejiang and Anhui that stopped or cut production decreased to 10

SMM surveyed 16 copper rod enterprises in Jiangsu, Zhejiang and Anhui, and found that the number of producers that reduced or stopped production last week was 10, a decrease of 2 producers from the previous week. The main reason is that some enterprises holding traffic passes can pick up the goods at warehouses of SIPG and CMSTD, temporarily alleviating the shortage of raw materials. However, the validity of the pass depends on the pandemic prevention and control measures in Shanghai.

Operating rates of copper foil companies rose as expected in March

According to an SMM survey, in March, the operating rates of copper foil companies stood at 92.42% on average, an increase of 6.08 percentage points from the previous month. The operating rates of large, medium-sized and small enterprises were 91.25%, 91.67% and 97.71% respectively. Operating rates at copper tube producers were better than expected in March According to the SMM survey on April 12, the operating rates of copper tube producers stood at 85.87% in March, up 18.37 percentage points on the month but down 1.94 percentage points on the year. Operating rates at copper tube producers were better than expected in March thanks to the traditional peak season after the CNY holiday.

Operating rates of copper cathode rod producers rose sharply but still could not reach the normal level

Operating rates of copper cathode rod producers stood at 66.16% in March, up 19.74 percentage points MoM, but down 2.06 percentage points YoY, the SMM survey showed. The operating rates of large, medium-sized and small enterprises were 69.07%, 61.02% and 56.33% respectively. (Notes: SMM surveyed 46 producers with a total production capacity of 12.40 million mt.)

Increase in operating rates of enamelled wire in March was less than expected

Operating rates of enamelled wire stood at 74.20% in March, down 10.11% on the year, but up 18.80% on the month, the SMM survey showed. The operating rate of large enterprises was 73.21%, up 16.91% from the previous month; that of medium-sized enterprises rose by 23.16% to 77.38%, and that of small enterprises rose by 7.19% to 53.64%.

According to an SMM survey on April 15, some enterprises with a traffic pass could pick up the goods at warehouses of SIPG and CMSTD. Besides, a truck passage specified for Shanghai has been set up at a high-speed intersection in Jiangsu. Enterprise vehicles can pass quickly with their traffic permits, so the transportation time has been shortened, alleviating the supply tightness of copper-based raw materials in a small number of enterprises in Jiangsu.

According to an SMM survey on April 13, the pandemic hindered the transfer of goods and raised transportation costs. Besides, the recycling efficiency of copper scrap was limited by the pandemic, arousing supply insufficiency. In south China, plants that have a large demand for copper scrap always have found it difficult to purchase raw materials to ensure their normal production. What’s more, downstream orders were poor. Some secondary copper rod enterprises said that if the above situations continue, they will have to stop the production.

2. Aluminium

The average operating rate of major aluminium processing enterprises dropped 3.3 percentage points from a week ago to 64.5% as of April 21. In terms of sectors, except for a slight increase in aluminium wire & cable sector and stable operating rates in aluminium plate/sheet and strip sector, the operating rates of all other sectors declined to varying degrees. The operating rates of primary aluminium alloy and aluminium extrusion sectors fell the most. The main reason was that the pandemic situation in east China, the main consumption area, has not improved, forcing some downstream enterprises to reduce their production. Falling orders and backlog of inventory of finished products also contributed to lower operating rates. The aluminium foil and secondary alloy sectors also saw a slight decline in the operating rates. The pandemic continued to affect transportation efficiency, making it difficult for enterprises to obtain raw materials and ship finished products. Insufficient orders and shortages of raw materials forced enterprises to lower their output. The market shall continue to pay attention to the impact of the pandemic on transportation in different regions. If the pandemic improves, downstream consumption is expected to recover quickly and the operating rates of downstream producers will rebound significantly.

Primary aluminium alloy: Last week, the average operating rate of leading primary aluminium alloy enterprises dropped by 4 percentage points to 63%. The main reason was that the pandemic situation in east China, the main consumption area, has not improved, forcing some enterprises to reduce their production. Falling orders and backlog of inventory of finished products also contributed to lower operating rates. Some market participants believe that the transportation is unlikely to recover before mid-May, thus the operating rates of leading primary aluminium alloy enterprises will not rebound significantly in the short term.

Aluminium plate/sheet and strip: The average operating rate of large aluminium plate/sheet and strip enterprises was flat at 78% last week. The aluminium prices were relatively stable last week, which did not have a great impact on the production enthusiasm of aluminium plate/sheet and strip enterprises. However, poor transportation in east China resulted in limited orders. The companies in Henan and Shandong have not resumed their production fully due to insufficient orders. The overall operating rates are expected to increase after the transportation in east China recovers.

Aluminium wire and cable: Last week, the average operating rate of large aluminium wire and cable producers increased by 1 percentage point to 54%, mainly driven by companies in Shandong who reported strong new orders. In other areas, the operating rates were basically flat. The transportation in Jiangsu and other regions improved slightly, easing the pressure of finished product inventory. Many companies will work against the clock to deliver orders after the pandemic situation improves. 

Aluminium extrusion: The average operating rate of large aluminium extruders dropped 4.2 percentage points to 71.3% last week. Some companies still had difficulties in transporting raw materials and finished products amid the pandemic, forcing them to lower their operating rates. The operating rate of construction aluminium extruders fell sharply as some areas adopted strict pandemic control measures, which hindered shipments and tightened cash flows. The operating rate of industrial aluminium extruders were relatively stable under the support of strong orders from the PV sector. The operating rate of construction aluminium extruders will continue to be suppressed by the pandemic in the short term, but orders will recover after the pandemic improves. In terms of industrial extrusion, some industry players believe that the operating rates will increase in May when the new energy vehicle market recovers. It is expected that the operating rates of large aluminium extruders will stabilise or rebound slightly this week, and it is still necessary to continue to pay attention to the impact of the pandemic in different regions.

Aluminium foil: The average operating rate of large aluminium foil companies fell 2.8 percentage points to 77.9%. The shipments in east China were still hindered by the pandemic. Aluminium foil companies in other regions reported a sharp decline in their orders. Since aluminium foil is mainly used for food packaging, the market is optimistic that aluminium foil demand will pick up after theis round of pandemic passes. Given the prolonged pandemic, the operating rates of large aluminium foil companies are unlikely to rebound this week.

Secondary aluminium alloy: The average operating rate of large secondary aluminium alloy enterprises dropped 1.9 percentage points to 45.3% last week. This was mainly because hindered raw material shipments forced companies in Jiangsu and Zhejiang to reduce their output. Production and transportation of alloy plants in Jiangsu and Shanghai still stagnated. Aluminium scrap imports in Zhejiang and Guangdong were paralysed by the pandemic, forcing local companies to reduce or suspend their production. In addition, the high prices of aluminium scrap and rising prices of natural gas increased the costs of secondary aluminium alloy plants, also prompting some companies to curtail their production. If demand and shipments are still suppressed by the pandemic, the operating rates will continue to fall in the short term.

3. Zinc

Zinc ingot: The pandemic has affected the transport in many places. Among them, Shanghai was the first to be hit by the pandemic, and the highway transport was greatly affected while the railway transport was more stable. With low arrivals of goods, the inventory was low in Shanghai. On the other hand, it was difficult to pick up goods from warehouses in Shanghai after the strict pandemic prevention and control measures, especially in April. The warehouses suspended the services of pick-up. Currently, the time to lift the lockdown is still unknown, resulting in increases in the inventory of Shanghai market. In Guangdong, the arrivals slowed down, but orders from downstream enterprises were greatly affected by the pandemic. The demand was suppressed, leading to the increases in the inventory of Guangdong. In Tianjin, some cross-provincial roads were blocked due to the pandemic, leading to the rising costs of cross-provincial transportation. With the difficulties in purchasing raw materials and delivering finished goods, the operating rates fell sharply. Many cities in Hebei were locked down, resulting in a slight increase in inventory of Tianjin.

Zinc oxide: Various enterprises could hardly purchase enough raw materials under the transport restrictions and high zinc prices, which have risen above 28,000 yuan/mt. With less orders, enterprises were unwilling to purchase, resulting in the low inventory of raw materials. In Xinghua and Taizhou cities in Jiangsu, due to more stringent transport restrictions, some enterprises have stopped the production while some of their orders have been transferred to neighbouring cities or provinces. On the whole, prices of raw materials for zinc oxide hovered at a high level. And it is reported that due to high freight costs, coefficient of zinc slag in some areas stood at 83. On the other hand, the zinc oxide prices (without invoices) rose from 19,000 yuan/mt to 20,700 yuan/mt. The poor acceptance by some downstream companies regarding the price hike was also one of the reasons for the sluggish consumption of zinc oxide. On the whole, the zinc oxide enterprises suspended half of their production under the impact of the pandemic. The operating rates are expected to maintain at about 50%.

4. Nickel

Nickel inventory: LME nickel moved rangebound last week. Although SHFE nickel rose strongly last week, the imports were still in losses. The inventory of Shanghai bonded area stood at 8,200 mt, and the inventory of nickel briquette and nickel plate stood at 2,900 mt and 5,300 mt respectively, flat from a week ago. The reason why the inventory in Shanghai bonded area remained unchanged is that the deliveries have been suspended due to the pandemic prevention and control. At present, the liquidity of LME nickel has not yet recovered and SHFE nickel prices faced pressure due to weak demand. The imports are expected to suffer losses this week.

Stainless steel: Production resumed in March after the Chinese New Year holiday, so the output in March increased significantly from February. While in April, due to the impact of the pandemic and the shortage of imported nickel-based raw materials, output of stainless steel decreased by 4% on the month, down 0.01% on the year. By series, the reduction was mainly found in 300-series. With large import losses, high costs and transport inefficiency, many steel mills were forced to reduce the output of 300-series or turned to produce other products. Therefore, output of 300-series decreased by 8.66% on the month and increased by 5.87% on the year. Output of 200-series decreased slightly by 0.61%, while 400-series increased by 4.7%.

According to SMM survey, the domestic output of stainless steel in March totalled 2.9735 million mt, up 790,200 mt or 31.4% from February and 1.51% on the year. By series, output of 200-series stood at 842,000 mt in March, down 14.18% on the year; output of 300-series stood at 1.667 million mt, a year-on-year increase of 22.1%. The output of 400-series stood at 553,000 mt, a year-on-year decrease of 17.62%.

5. Magnesium

Last week, the magnesium market was affected by the pandemic. The demand that was already suppressed got worse as the domestic land transportation was greatly blocked, which led to the continuous downward trend of prices.

As of Friday, the mainstream transaction prices of magnesium ingots in Fugu area were 36,500 yuan/mt, down 2,750 yuan/mt from the beginning of the week. It is learned from the magnesium plants that due to the influence of pandemic in Shanxi, the truck transportation in the main producing area of magnesium ingots was restricted, so some factories cannot deliver their orders. It is reasonable that magnesium prices declined under the pressure of the continuous weak downstream demand and the high inventory on the supply side. At the same time, due to the differences in brand, product quality and capital capacities among factories as well as the rising inventory pressure, the prices of some enterprises have dropped, so that there was a large different in the overall quotation of the market.

At present, the domestic demand may remain weak as the cross-region logistics was still hindered amid the spreading pandemic. Considering that the overseas procurement period in the third quarter is approaching, if the overseas orders perform well, the magnesium prices may stop falling. SMM will continue to pay attention to the subsequent placement of overseas orders.

6. Industrial silicon metal

Due to the outbreak of the pandemic in many places, the transportation of raw materials and finished products was hindered, so that the downstream operating rates declined. The weak demand has led to the decline of silicon prices. The silicon prices dropped only slightly after taking into account the factors such as high cost and the absence of financial problems for most manufacturers. When the pandemic is controlled, the silicon prices are expected to rise slightly as the consumption will improve, and the demand from new silicone capacity will also be released.

Secondary aluminium alloy: The production of aluminium alloy in March and April was affected by the shortage of aluminium scrap, the high prices, weak demand and other problems.

Primary aluminium alloy: The prices of silicon and major auxiliary materials have surged, and the primary aluminium alloy producers have suffered losses. In this case, aluminium alloy prices are settled in a new way based on the silicon prices and conversion margins of aluminium alloy.

7 Cobalt & Lithium

Recently, the pandemic in Shanghai has intensified, including the surrounding cities in Jiangsu and Zhejiang. In addition, Changchun, where the pandemic occurred earlier, was also affecting local manufacturing. This round of fierce pandemic outbreak has also impacted the whole new energy industry chain. The first to be hit is the automotive industry. FAW Volkswagen in Changchun took the lead in suspending the production on March 13. Tesla and SAIC Volkswagen in Shanghai also suspended the production after the COVID outbreak in the city. At present, there is no news about when they will resume the production.

Besides, the pandemic had a significant impact on the automobile supply chain as most of the automobile components and parts enterprises are located in Jiangsu, Zhejiang and Shanghai. At present, vehicle manufacturers across the country have successively suspended or reduced the production due to the insufficient supply of components and parts. The orders received by battery enterprise also showed declines amid the huge impact faced by downstream automobile enterprises. At present, some battery enterprises have reported that the pandemic has affected the annual production scheduling plan, and most battery enterprises have experienced decline in orders of April and May.

In terms of quantity, take Tesla as an example. According to SMM data, the current weekly production capacity of the factory in Shanghai is about 17,000 new energy vehicles, and the daily production capacity is about 2,500 new energy vehicles. Tesla has suspended the production for 17 days since March 28. However, it is expected that the best scenario is to resume he production at the end of April as the pandemic in Shanghai is hard to be fully controlled at present, which will cause a loss of production of at least about 85,000 new energy vehicles. Even if these production reduction was Model 3 standard endurance model with 55Kwh batteries, the production suspension would reduce its demand for upstream lithium iron phosphate materials by nearly 11,000 mt and lithium salt by about 3,000 mt.

In addition, coupled with the impact of production suspension and reduction of other automobile enterprises, it is expected that the impact on the downstream market will reach about 15% - 20% in April, and the consumption of battery will decrease accordingly. In April, the top-tier battery enterprises have reduced their purchases in light of increasing inventory and with the purpose of curbing high lithium prices. In addition, due to the impact of the pandemic, the battery enterprises are expected to reduce the purchase of materials further by more than 15% in April and May. The impact of the pandemic was greater than expected. At present, the supply of lithium has increased month-on-month, while there is more room for demand to decline. The supply and demand structure in the lithium salt market has been reversed, and the decline of lithium prices is a foregone conclusion.