Metal Mining Profits Dropped as A Whole in Q1 on Market Chaos

SHANGHAI, May 18 - In the first quarter, China's overall economic environment and business activities were affected by the recurring pandemic across the country and the continued evolution of the international geopolitical situation, with China manufacturing purchasing managers' index falling to 49.5 in March, running below the 50-point mark. From an overall perspective, in the first quarter, China's overall economic climate index has fallen. On the one hand, production and demand both declined. Affected by the repeating pandemic, some manufacturers temporarily cut or suspended the production, affecting the normal production and operation of relating upstream and downstream enterprises of the industrial chain. Domestic demand is relatively slow. External markets, meanwhile, were also affected by the recent geopolitical situation, and some enterprises’ export orders were blocked. On the other hand, raw material prices continued to be high represented by energy and metals, putting pressure on the costs of downstream industries. The shutdown of production in the otherwise very active electric vehicle sector after entering April is a microcosm of the enormous difficulties currently facing the China economy.

Metals profits narrowed as a whole

According to the National Bureau of Statistics, from January to February 2022, China's metal mining industry achieving an operating income of 2,457.0 billion yuan, an operating profit of 91.86 billion yuan with the industry profit margin of 3.7%, down 2.6% year-on-year. Among them, the non-ferrous metal industry’s operating income stood at 1,102.8 billion yuan, industry profits at 59.07 billion yuan, industry profit margin at 5.4%, an increase of 61.0%. Ferrous metal industry’s operating income was 1,354.2 billion yuan, industry profits 32.79 billion yuan, and profit margin only 2.4%, down 43% year-on-year. From the overall industry operation, the non-ferrous metal industry was running significantly better than the ferrous metal industry represented by steel.

Base metals prices rose again in Q1

In January-February 2022, copper prices (LME 3-month, closing price) basically hovered around US$9,600-9,900/mt. After March, affected by market concerns triggered by economic sanctions against Russia by the US-led Western countries, copper prices rose above $10,000/mt and reached a record high of $10,600/mt on March 4.

As of April 8, the annual average price of copper (LME 3-month, closing price) was $10,012/mt. In the short term, copper prices are likely to surge further to $12,000/mt under the influence of multiple factors such as capital games, geopolitical tensions, US interest rate hikes and recurring COVID in China. However, it is expected that copper prices may fall sharply in the second half of this year.

Influenced by the ongoing energy crisis and geopolitical tensions in Europe, aluminium prices (LME 3-month, closing price) rose to $3,840/mt at one point in the first quarter of 2022, before staying congested between $3,400-3,600/mt.

More than 40% of aluminium smelters in Europe have suffered losses since December 2021 due to high electricity prices caused by the energy crisis, which, combined with geopolitical tensions, has led to a short-term surge in market concerns about the overall imbalance between supply and demand for aluminium, with the annual average price of aluminium (LME 3-month, closing price) at $3,273/mt as at April 8 2022, an increase of more than 54% year-on-year. From a short-term perspective, in light of supply-demand imbalance and market speculations on the long side, aluminum prices still have the possibility of rise further, but may also retreat in the second half of this year.

In January-February 2022, zinc prices (LME 3-month, closing price) basically hovered between $3,500-3,700/mt. After March, affected by market concerns triggered by the economic sanctions against Russia by Western countries led by the United States, zinc prices once reached $4,305/mt, the highest level in nearly 10 years.

As at April 8, the annual average price of zinc (LME 3-month, closing price) was $3,778/mt. In the short term, the European energy crisis has pushed up zinc smelting costs, and local market supply is tight. The global zinc supply gap has given market capital ample excuse for speculation. And with unexpected events pushing up market concerns and panic, volatility in the zinc market is expected to be intense and zinc prices are likely to continue to move upwards.

Since this year, stimulated by new energy and the geopolitical situation, nickel prices have been on the rise. On March 7-8, nickel prices rose 295% in two days to $80,000/mt, and once surpassed $100,000/mt during the day, setting a new record high.

Driven by domestic stainless steel and power battery markets, the global nickel supply shortage is always there in recent years. Geopolitical tensions and precise strike from the capital markets triggered malicious speculation in the market capital. As of April 8, nickel (LME 3-month, closing price) annual average price recorded $31,492/mt. In the short term, the "Tsingshan" short squeeze incident is not over, and nickel prices will continue to move violently.

In January-February 2022, lead prices (LME 3-month, closing prices) moved between $2,200- 2,350/mt. After March, lead prices once surged to $2,553/mt due to the geopolitical situation, and have since then fallen to $2,400/mt.

The lead market has been running relatively modestly due to the suppression of new energy batteries. As China's lead production took up nearly half of the global share, lead prices are more active in the foreign market than in the domestic market. In the short term, the repeating pandemic in many places will have some impact on lead supply. But the market sentiment will still most likely follow the trend of the commodity market and the overall performance is expected to be relatively moderate.

Market prospect

The United States, the world's largest economy, is now facing the most serious inflation problem in nearly 40 years. On March 16, the Federal Reserve announced a 25 basis point interest rate hike. And recently, news came that the Federal Reserve will raise interest rates again by 50 basis points in May. With the successive interest rate hikes, there are clear signs of capital outflows, which will have a greater impact on the stability of China’s financial markets. The withdrawal of capital in the short term will trigger the rise of commodity prices.

At present, China's economic development is plagued by multiple pressures. In December 2021, the Central Economic Work Conference put forward that "efforts should be made to stabilise the macro-economy and keep the economy running in a reasonable range". The government work report once again stressed that the work in 2022 should adhere to the principle of "stability" and seek progress with emphasis on maintaining stability. In the face of new downward pressure, steady growth should be given a more prominent position. And the GDP should achieve a growth target of around 5.5%. Due to the recurring pandemic in many domestic areas since March, the pressure on economic development in the latter part of the year is greater. Therefore, it is foreseeable that the country's stable investment, consumption promotion, economic growth and other aspects will receive more policy support especially in sectors like real estate, infrastructure construction.

Based on the above considerations, it is optimistic that the metal mining industry as a whole will remain "bullish" in 2022, but market uncertainties will still exist and investors shall stay alert to bearishness.