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Outlook on Market Conditions and Prices for Key Nonferrous Metals

Nonferrous metal prices are expected to remain high in 2010

Nonferrous metal prices rose in H1 2009 due to stockpiling by China and speculative demand driven by the weakening dollar. Prices are expected to continue to rise in 2010 due to ample liquidity, the continuing weakening of the dollar and growing real demand.
In spite of expectations of excess supply, copper prices are expected to rise on the back of the weak dollar, relatively low inventory, and a recovery of demand from China, which suffers from chronic supply shortages.
Zinc prices have fared relatively well in the economic downturn, and are expected to remain strong due to tight supply and demand conditions, speculative demand, and growing real demand driven by China.
However, aluminum is less likely to see price increases. This is due to decreased stockpiling by China, relatively high inventories, and a clear upward trend in supply.


Financial Assessment of Domestic Nonferrous Metal Industries

Refining, copper processing, and aluminum processing firms are financially stable

Domestic copper, zinc, and aluminum refining and processing firms were analyzed as of H1 2009. Refining firms were found to be in better condition than processing firms.
This is because refining firms’ earnings are driven by treatment charges (TC) which fluctuate with LME prices. Domestic refining firms dominate their home market, and rising international LME prices have allowed them to improve their operating margins.
In contrast, processing firms’ earnings structure is based on roll margins. Aside from the major firms which dominate the market, a large number of smaller firms lack negotiating power, and cannot fully reflect cost increases resulting from rising LME prices into their sales prices.
Among processing firms, copper processing firms are in better condition than aluminum processing firms in terms of 3 indicators, excluding inventory turnover.
An analysis conducted in H1 2008 for the purposes of adjusting the Group’s loan portfolio produced similar results.
Among 19 firms targeted for credit line reductions, 17 were processing firms. Among these, 10 were aluminum processing firms and 3 were copper processing firms.
Among the 25 firms targeted for increased credit lines, 6 firms were refiners.

Refining firms will benefit more from rising international prices

The nonferrous metals industry will generally benefit from rising LME prices in 2010, and profitability is rebounding after bottoming in Q4 2008.
In particular, refining firms will record improving profitability as a result of rising metal prices, but small-to-mid size processing firms will continue to record weak profitability.