January 21, 2016 / 2:26 PM / 4 years ago

Aluminum stockpiling fund gives glimpse of China metals reforms

HONG KONG/BEIJING (Reuters) - China’s plans to set up funds to manage coal and steel capacity closures and stockpiling schemes offer nervous markets some clarity on the likely future make-up of the country’s sprawling and predominantly state-run metals and mining industries.

Workers ride on an motor rickshaw through an aluminium ingots depot in Wuxi, Jiangsu province in this September 26, 2012 file photo. REUTERS/Aly Song/Files

As the world’s largest producer of aluminum, steel and other metals, and the biggest consumer of copper and iron ore, China is crucial to global metals markets which have slumped in the past year as Chinese industrial demand growth slowed.

China’s slowdown has hit revenue at global miners such as BHP Billiton and Rio Tinto, and the market is keen to know what China plans for its own state-run mining and metals giants - many of which have kept producing even as prices drop below the cost of production.

After weeks of talks between government officials and leading metals producers, Beijing looks set to take a direct approach to managing capacity cuts and layoffs in coal and steel. It will provide smaller-scale financing deals to groups of producers of non-ferrous metals, such as aluminum, for stockpiling and capacity cutback initiatives.

On Thursday, state media reported that Beijing will allocate 30 billion yuan ($4.56 billion) over the next three years to support the closure of small and inefficient coal mines, and re-deploy some 1 million workers. Similar measures are expected to be unveiled for the steel sector. Both industries have huge over-capacity.

Last week, six big aluminum producers - Aluminum Corp of China (Chinalco), State Power Investment Corp, Yunnan Aluminum, Jiugang Group, Jinjiang Group and Weiqiao Aluminum & Electricity - agreed to set up a new company to handle a proposed stockpiling scheme and to coordinate and monitor production levels across the group, said two people with direct knowledge of the matter.

Similar group-based initiatives are being considered by zinc and copper producers, but these are at a less advanced stage.

With demand weakened by the economic downturn, a metals glut has dragged prices to multi-year lows, causing widespread losses.

JOINT COMPANY

The aluminum stockpiling program is part of a bigger plan proposed late last year by smelters and the state-controlled China Nonferrous Metals Industry Association.

The producers have been in talks for several weeks with state-owned China Development Bank (CDB) for loans, and the establishment of the new joint company was a necessary step to access funding, the two knowledgeable people said.

“(We) have invited the CDB to support (the funding),” said one of the two individuals, adding the bank funding would be used to stockpile nonferrous metals, and its scale would depend on smelters’ needs. He said aluminum stockpiling could start before the Lunar New Year holiday in February, when demand was weak.

The CDB did not respond to requests for comment.

Local media and postings on Chinese chatrooms say loans could total around 30 billion yuan and mature in three years. About a third would be used to stockpile aluminum, with another third used to buy nickel.

Traders warned that commercial stockpiling was unlikely to support prices over the longer term, with demand still weak, and stronger prices could tempt some to re-start idled capacity, adding to the supply glut. Nearly 5 million tonnes of aluminum capacity was idled last year, according to the industry body.

“Stockpiling may support prices for 1-2 months. After that, we have to see demand and production cuts,” said a trader at a state-owned investment firm.

Traders are also concerned the stocks could be hedged in futures markets, which could be a drag on prices. The aluminum producers have not discussed whether or not to hedge the stocks, the second knowledgeable individual said, and today’s low prices should discourage hedging.

MORE HELP

The CDB loans could also help cover the cost of closing capacity at cash-strapped state-owned aluminum smelters, said a smelter executive briefed on the stockpiling program.

A worker walks through an aluminium ingots depot in Wuxi, Jiangsu province in this September 26, 2012 file photo. REUTERS/Aly Song/Files

Though severe over-capacity has been identified as a major problem across a range of industries, loss-making firms are reluctant to exit, saying they cannot afford to settle debts and staff redundancy payments.

“Some firms want to get out ... but an exit route has not been opened up. Some local governments continue to urge steel firms to produce in the interests of local economic development and social stability,” Zhang Guangning, outgoing chairman of the China Iron and Steel Association, said at a meeting last week.

Shenwan Hongyuan Securities estimates the funds required to make a real dent in coal and steel capacity could be as much as 200 billion yuan ($30.4 billion).

Reporting by Polly Yam and David Stanway, with additional reporting by Ruby Lian in SHANGHAI; Editing by Gavin Maguire and Ian Geoghegan

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