VZCZCXRO0907
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1654/01 1690417
ZNR UUUUU ZZH
P 180417Z JUN 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4615
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BEIJING 001654 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, 
VENKATARAMAN, KEMP, MILLER, MALMROSE 
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN 
(6510) 
TREASURY FOR OASIA/WINSHIP 
 
E.O. 12958:  N/A 
TAGS: ECON EWWT EIND ETRD CH
 
SUBJECT: CHINA'S NON-FERROUS METALS INDUSTRY GETS GOVERNMENT 
SUPPORT 
 
REF: Beijing 661 
 
BEIJING 00001654  001.2 OF 002 
 
 
This cable is Sensitive But Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) Summary: China announced May 11 a detailed three-year plan 
to stimulate its non-ferrous metals industry focused on industrial 
consolidation and technology innovation.  The plan encourages 
regrouping among non-ferrous metal companies with the goal of 
forming three to five large-scale corporations with advanced 
technology and production capacity by 2011, particularly for 
non-ferrous metals such as copper, aluminum, lead and zinc.  The 
plan also calls for the reduction of overcapacity, although some 
industry sources predicted resistance from local governments. 
Embassy contacts said that large state-owned enterprises (SOEs) 
would be the likely beneficiaries of support measures, including 
export rebates, subsidies for technology, and support for overseas 
acquisitions. End Summary. 
 
Support for Industry Hit Hard by Global Economic Downturn 
--------------------------------------------- ------ 
 
¶2. (U) The State Council announced May 11 a non-ferrous metals 
industry revitalization plan to promote industry growth, increase 
domestic demand, and stabilize the market.  The plan calls for 
controlling total production volume, eliminating outdated and 
inefficient production, improving technology and promoting 
restructuring.  More specific supporting policies are expected to be 
announced soon.  After a decade of rapid growth, China's nonferrous 
metals industry was hit hard by the global economic downturn 
starting in September 2008.  The prices of some metals dropped 70 
percent, stockpiles increased dramatically, exports declined, and 
many producers either reduced production or closed down their 
factories.  According to industry analysts, the economic downturn 
has focused the government's attention on the need to reduce 
overcapacity, restructure the industry, promote innovation and 
eliminate backward production. 
 
Calls for Industry Consolidation 
--------------------------------- 
 
¶3. (SBU) The plan calls for the creation by 2011 of three to five 
nonferrous metal corporations with advanced technology and 
production capacity. By 2011, the country's top ten producers of 
copper, aluminum, lead and zinc are expected to occupy 90 percent, 
70 percent, 60 percent and 60 percent, respectively, of the total 
domestic production volume.  The plan encourages large "backbone" 
enterprises to carry out mergers and acquisitions within their 
regions and even across regions, supports aluminum companies to 
merge with power companies in China's western provinces, and 
encourages restructuring among metal recycling companies.  The plan 
also mentions increasing financial support for the "backbone" 
enterprises, including possible government support regarding bank 
loans.  According to industry sources, large-scale SOEs such as 
Chinalco, Jiang Tong Copper, Minmetals, Jinchuan and Zhong Jin Ling 
Nan Gold will be the likely beneficiaries of industry 
consolidation. 
 
Focus on Reducing Overcapacity 
----------------------------- 
 
¶4. (U) As part of its focus on reducing overcapacity, the plan 
stipulates that no new electrolytic aluminum projects will be 
approved by the government in the next three years.  The plan calls 
for strict implementation of entry standards and tight control over 
newly increased production capacity of copper, lead, zinc, titanium 
and magnesite.  The plan set targets for 2009 to gradually eliminate 
production that relies on backward technology and high energy 
consumption and causes significant pollution:  copper refining 
capacity will be reduced by 300,000 tons, lead refining capacity by 
600,000 tons and zinc refining capacity by 400,000 tons.  The plan 
also mentions the possibility of suspending approval for investment 
projects in regions which are not eliminating inefficient/energy 
intensive capacity or for projects that do not adhere to such 
standards, although it is not clear whether such measures would be 
enforced. 
 
But Will Local Governments Agree? 
-------------------------------- 
 
¶5. (SBU) Industry experts expressed doubts about the government's 
ability to eliminate overcapacity, citing local governments' 
 
BEIJING 00001654  002.2 OF 002 
 
 
resistance to closing down factories in their regions.  China 
Non-ferrous Metals Industry Association International Department 
Director Bian Gang said eliminating overcapacity would require 
legislation that sets standards of energy consumption and emissions, 
arguing that many local governments would seek to protect 
metallurgical refineries to maintain GDP growth.  Nevertheless, Bian 
predicted that market forces would drive many smaller, less 
efficient producers to close down, as production costs of these 
companies exceeded commodity prices. 
 
Export Rebates and Technology Subsidies 
--------------------------------------- 
 
¶6. (SBU) Two areas of possible concern involve measures to "improve 
the export environment" and subsidies to improve technology.  The 
plan calls for flexible policies on export duties to encourage the 
export of higher value-added products.  Effective April 1, 2009, the 
State Council increased VAT export rebates of some non-ferrous metal 
products to the 9-17 percent range, including high-tech and 
value-added products such as refined copper sheet and nickel alloy 
bar.  The plan also emphasizes the need for improving technology, 
particularly of those companies that produce key materials for 
national defense and the aviation and electronics industries.  The 
government announced May 6 a RMB 20 billion (USD 2.9 billion) fund 
to promote technology improvement.  Although this technology fund 
was not specifically part of the non-ferrous industry revitalization 
plan, the non-ferrous metals industry was listed as one of the key 
industries that could benefit from the fund. Industry sources 
predict that SOEs would likely receive the lion's share of subsidies 
for technology upgrades. 
 
Support for "Go Out" Policy 
--------------------------- 
 
¶7. (SBU) As part of China's "go out" (zouchuqu) policy encouraging 
overseas acquisitions, the plan calls for Chinese non-ferrous metals 
companies "to strengthen international cooperation in order to 
improve the capability to guarantee resources."  Although short on 
specifics, the plan does mention simplifying the approval process 
for companies going overseas and providing support for the 
companies' credit, foreign exchange, insurance, taxation, personnel 
and visa needs.  Commenting on the recent collapse of the Rio 
Tinto-Chinalco deal, China Non-ferrous Metals Industry Association 
Director Bian Gang suggested that many Chinese companies lack 
international experience and should form joint ventures with other 
international companies when bidding overseas. 
 
Comment 
------- 
 
¶8. (SBU) Despite the collapse of the Rio Tinto-Chinalco deal, recent 
deals struck by state-owned Chinese companies Minmetals and China 
Nonferrous in Australia suggest that many large Chinese SOEs are 
still in a strong position to make overseas acquisitions.  Enjoying 
the strong backing of China's government, these SOEs will likely 
continue to consolidate domestically and expand overseas in the 
coming years. 
 
PICCUTA