Cyclicity, A Decisive Role in Chinese Nonferrous Companies’ Operation

Currently, big cyclical fluctuations have taken place in commodity market, which has led to a lot of challenges for Chinese nonferrous companies to deal with market risks.

At the beginning of 2020, the sudden outbreak of COVID-19 all around the globe made everyone in the planet panic.There has been a dramatic drop in global economy and a flash crash in global stock market and commodity market.Having to face such huge fluctuations in non-ferrous market, domestic companies or most foreign companies were terrified, surprised, confused and not knowing what to do.As a matter of fact, coming from the old days, such cyclical change is not a new phenomenon.In western countries, before Futures Exchanges were established, rise and fall in price was a part of physical trading system due to influences including supply and demand, transportation and cost, only the fluctuations then were not as strong as today in terms of frequency and extent.Since 1990s, frequent rises and falls in price have grown into a normal state, and the market is manifesting obvious cyclical changes.This shows that minor cycle of copper price lasts for 1 to 3 years and major cycle lasts for 7 to 10 years.No matter in minor cycle or in major cycle, copper price increases or decreases by at least 50%, even as high as 200%-300%.Such frequent dramatic rises and falls, which make it very difficult for non-ferrous companies to maintain normal operations, are huge influences to these companies.When the peak comes, nonferrous companies are filled with exultation because they are able to make a fortune.When the bottom comes, the companies feel depressed because they have to work hard just to keep their businesses going.For them,one day seems like a year.Many non-ferrous companies are deeply in debt and carefully struggling at the bottom of cycle, and some are so overwhelmed and they even sadly step down from the stage of history.

Cyclical factors (rise and fall in price) have generated noticeable and huge influences to non-ferrous companies in revenue and profit, which makes it necessary for us to examine cyclical factors and risks.Why do such cyclical changes appear in non-ferrous market? What measures the companies should adopt to deal with such cyclical changes?

In my view, there are many reasons leading to cyclical changes in commodity market.Firstly, it is a natural law or natural phenomenon for commodity market to see rise and fall in price, including non-ferrous market.Secondly, “Black Swan” incident is an important factor leading to cyclical changes.Thirdly, state fiscal and monetary policies of major global economies are factors bringing about cyclical changes.Fourthly, the profit-seeking nature of capital is an important factor giving rise to cyclical changes.A coin has two sides.Capital is of the nature of speculativeness, and investors are waiting for and seeking opportunities anytime and anywhere.Fifthly, imbalance between supply and demand in commodity market is an important reason for cyclical changes in commodity market.

Blindness and randomness are two undeniable features in people’s production and consumption activities.These two features are important reasons leading to imbalance between supply and demand in market.In particular, these two features are getting more prominent as Chinese economy is developing swiftly since we entered the 21st century.Once a product sells well and generates high profits, people rush to produce it and sell it.The products get produced more and more until supplies far exceeds demands and price falls below the cost line ultimately.Once a business is booming,similar businesses are appearing all over the place very soon, leading to excess supply of homogeneous products.

Additionally, the blindness, crowd psychology and irrationality (greed and fear) of the players in commodity market further aggravates such cyclical changes in commodity market.

We have teased out so many factors that can result in such cyclical changes in commodity market and we all know that such changes are deep-rooted and irreversible.They happened before and they will be likely to happen again in the future.What can the companies do to deal with the risks that result from such cyclical changes?

In my view, non-ferrous companies do have some effective measures to adopt to minimize risks and maximize profit during cyclical changes.

First of all, a risk-warning mechanism should be established among non-ferrous companies.It is known to all that there are various kinds of risks in the market,including policy risk, compliance risk,counterparty risk, contractual risk, product risk and price risk.Only by making sufficient preparation in advance can we effectively deal with risks when they approach.An effective and complete risk-warning mechanism for companies should involve: 1.Integrated and strict rules and regulations for daily transactions to inspect and supervise if they comply with regulations and if there is any exposure to risks.2.Companies also need to construct a professional, quality and well-disciplined trading team that is able to make accurate predictions on all risks in the market.3.To construct and maintain an intact and unblocked transaction channel for futures and spot goods.The society is developing swiftly in today’s world and markets are interacted on each other.Futures market and spot goods market are both very important to non-ferrous industry so the transaction channel for the two markets has to be unblocked, because opportunities seldom knock twice.4.A benign credibility and capital safeguarding system has to be constructed.A company that lacks benign credibility and capital safeguarding is hard to seize opportunities in the cycle.5.An efficient hedging and trading strategy should be formulated for companies to decide appropriate trading strategies for certain market conditions: whether to purchase spot goods or to purchase futures? Cyclical changes bring about opportunities as well as risks.For instance, the dramatic fall in nonferrous metal price in 2020 brought about opportunities of significant historic meaning.Companies need to make prompt reactions according to market changes and their own predictions.

Secondly, non-ferrous companies should not only know themselves but also know the situation they are in.Non-ferrous companies should not only know themselves, i.e.knowing their own positions in the market,knowing their own producing and operating status, knowing their own product quality and brand awareness, and knowing their own technical level and pros and cons.In the meantime, the companies also need to know the whole industry, industry chain, product features, production cost, supply and demand and their counterparties.In a word, those companies have to know all the information related to the market.For instance, they should pay close attention to the principal factors that will lead to cyclical changes in commodity market.Only by knowing those factors in advance are the companies likely to predict cycles in time and identify cyclical changes and opportunities.

In addition, non-ferrous companies should continuously carry out reform and innovation in technology, product, mechanism,management and trading manners.It needs to be reiterated that innovation is important to our country in many aspects including science and technology, social production and economic development.Only by making innovations can China grow into a powerful country.Actually, Chinese non-ferrous country is faced with the similar problem, i.e.only by making innovations can the industry further develop.Only by making innovations can companies further develop and remain invincible at each cyclical peak and bottom.It even is an obligatory duty for non-ferrous companies to make innovations.

Chinese non-ferrous industry has been developing rapidly for the past 20 years,and the production and consumption of a lot of bulk non-ferrous metals has occupied half of global market.China has already become a big country in non-ferrous metals but not a powerful country yet.Chinese nonferrous industry suffers from inadequate capability of making innovations, especially the fact that China has to rely on import of key basic materials, advanced technologies,industrial technologies and core components.Localization level of key equipment and key technologies applied to mines, smelting plants and downstream processing plants are yet to be raised.There is a long and tough process awaiting us before we achieve the most advanced international level.The higher the technical content is, the higher the additional value is.High-end technology products are not affected by cyclical fluctuations in the price of upstream raw materials.Only by making innovations can non-ferrous companies develop in a healthy and steady way and get rid of cyclical risks to the greatest extent.

Besides, non-ferrous companies should strengthen industrial self-discipline.Selfdiscipline is the code of conduct for every industry to develop healthily in the long run.If companies do not strengthen industrial self-discipline, and if they go for disordered competition such as undermining each other’s working, disordered bidding trading,blindly expanding production capacity and blindly carrying out homogeneous production in quantity, none of them is able to develop, let alone fighting against cyclical market risks.

Last but not least, non-ferrous companies should respect market discipline and seize the momentum.Now that we realize that cyclical market changes are an irresistible natural law for human beings, companies should respect such changes, find out their characteristics and formulate measures to deal with them, thus maximizing profits during cyclical changes every time.

For instance, in upward cycle, it is reasonable for companies to actively shore up their balance sheets by all means to raise their positions in industry.On the other hand, in downward cycle, it is reasonable for companies to divest themselves and narrow their exposures for risks, such as reducing inventories and increasing cash flows.There is so much for Chinese companies to learn from big mining companies like GLENCORE and BHP Billiton.For many times in the past, in downward cycles, big international mining companies like GLENCORE chose to reduce working capital and production cost in time, reduce inventories and unefficient capacity, and increase cash flows, etc.This is how GLENCORE seizes the momentum and these are excellent measures to deal with cyclical changes.

Notification from Two Ministries on Issuing Control Indicator of Total Exploiting Amount of Rare Earth Ore and Tungsten Ore in 2021

At the end of September, Ministry of Natural Resources and MIIT released a notification on issuing control indicator of total exploiting amount of rare earth ore and tungsten ore in 2021.Specific content is as follows: For the purpose of protecting and reasonably exploiting superior mineral resources, based on relevant regulations on protectively exploiting special minerals, it is hereby notified that the control indicator of total exploiting amount of rare earth ore and tungsten ore in 2021 be implemented.

1.In 2021, the control indicator of total rare earth ore (REO, the same below) exploiting amount nationwide is 168000 tons, including 148850 tons of rock-ore type rare earth ore(mainly light rare earth) and 19150 tons of ionic rare earth ore (mainly middle and heavy rare earth).The control indicator of total tungsten concentrate (the content of tungsten trioxide 65%, the same below) exploiting amount nationwide is 108000 tons, including 80820 tons of primary exploiting and 27180 tons of comprehensive utilization.The aforesaid indicators cover the first batch of indicators issued in Notification from Ministry of Natural Resources on Issuing Control Indicator of Total Exploiting Amount of Rare Earth Ore and Tungsten Ore in 2021 (First Batch) (MNR [2021] No.24).Please refer to the appendix for specific assignment.

2.Competent departments of natural resources in relevant province and autonomous regions should strictly follow rules and regulations to complete indicator decomposition and issuing within 10 working days after the notification is issued.Control indicator of total exploiting amount of rare earth ore should be intensively issued to mine companies affiliated to rare earth groups.

3.After decomposing and issuing the control indicator of total exploiting amount of rare earth ore and tungsten ore, competent departments of natural resources in relevant province and autonomous regions should summon municipal and county-level competent departments of natural resources in the regions where the mines lie in and mining companies to sign liability statements to specify rights, obligations and violation responsibilities.Local governments at all levels should adopt measures to practically consolidate the verification and examination on the implementation of indicators of rare earth ores and tungsten ores and accurately collect actual yield of mining companies.

CATL Invested RMB 32 Billion in The project of Materials

Recycling of Used Batteries Becomes the Highlight

In mid-October, CATL made announcement that the Company plans to invest in the construction of Integrated Battery Material Industrial Park in Tianjiahe, Yao Jiagang Chemical Industry Park, Yichang of Hubei,with a total investment of no more than RMB 32 billion, in the name of the Company’s holding subsidiary, Guangdong Brunp and its holding subsidiary.The project mainly aims to construct an intensive and scale production base dedicated to recycling of used batteries,lithium iron phosphate and ternary precursor,lithium iron phosphate, lithium cobalt oxides and ternary cathode material, graphite and phosphoric acid.

According to the announcement from CATL,the project aims to satisfy the demands of the Company to expand the capacity of power battery, give play to industrial collaborative advantages, safeguard the Company’s battery material supply and propel the purpose of quitting power battery life-cycle management.This is of huge meaning to cost control and improve product competitiveness.

In terms of shareholding, the subsidiary of Guangdong Brunp, Ningbo Brunp Contemporary New Energy Co., Ltd.holds 65% and Hubei Yihua holds 35%.Primary business of Ningbo Brunp Contemporary New Energy Co., Ltd.centers on resource regeneration technologies, energy recycling systems, recycling of waste power batteries of NEV.

All the signs indicate that the highlight of CATL’s RMB 32 billion – worth project is recycling of waste power batteries and the battery materials thus generated.It is not the first time that CATL makes arrangement in battery recycling.CATL stepped into battery recycling business by acquiring Brunp Cycling as early as in 2013.SAIC Motor and CATL entered into strategic cooperation in 2018 for the purpose of co-promoting recycling and reusing of NEV power batteries.

It is worth mentioning that Hunan Brunp, as an important subsidiary affiliated to CATL,has already grown into the biggest waste battery recycling base in China with total an annual disposed waste battery volume of over 6000 tons.CATL’s huge investment in waste battery recycling this time indicates the great importance the battery giant attaches to battery field.

In addition to CATL, Gotion High-Tech, EVE Lithium and Farasis have joined the battle in succession since the second half of the year.The war fire in NEV industry has extended from battery manufacturing to battery recycling.

According to national regulations, power batteries have to be decommissioned when their capacity declines to below 80% of rated capacity.The power batteries utilized for the first batch of NEVs are decommissioned.Statistics show that there were as many as 200000 tons of power batteries being decommissioned in China in 2020 (almost 25GWh).It is estimated that, after 2025, the volume of decommissioned batteries every year will exceed one million tons.

On one hand, it is difficult to dispose waste lithium batteries because they contain electrolyte and organic solvent so the disposal needs to be strictly regulated.On the other hand, waste lithium batteries contain precious metals like cobalt, lithium and nickel.Battery recycling can help battery manufacturers acquire lithium, cobalt and nickel while avoiding the influence of price fluctuations.According to Market scale and recycling technology of waste lithium ion batteries, even if lithium iron phosphate batteries, the batteries with the least content of lithium, contain 1.6%of lithium, which is still higher than the crude ores we are exploiting, whose grade is just 0.8-1.4%.

North Rare Earth Plans to Construct Two Rare Earth Projects to Greatly Develop Rare Earth

In late October, North Rare Earth made announcement that North China Rare Earth(Group) High-tech Co.LTD.(referred to as the Company below) plans to invest its own capital of RMB 97.5806 million in constructing “industrial pilot project of green environmental-protection new smelting technology for rare earth ore concentrate in Bayan Obo Mining District”, aiming to replace high-temperature roasting process with low temperature dynamic roasting.

For the purpose of implementing policy deployment of emission peak and carbon neutrality, accelerating the Company’s green transformation, fully upgrading technical skills for roasting process of rare earth ore concentrate, realizing energy saving and emission reduction and tail gas separation, improving automation degree and site conditions, further reducing comprehensive cost, and consolidating green smelting separation and scale and intensive production, the Company plans to invest its own capital of RMB 97.5806 million in constructing “industrial pilot project of green environmental-protection new smelting technology for rare earth ore concentrate in Bayan Obo Mining District”, aiming to replace high-temperature roasting process with low temperature dynamic roasting.The project plans to build a pilot industrialized production line of new smelting technology for rare earth ore concentrate in Bayan Obo, with the annual capacity of 10,869 tons (converted REO) of hybrid rare earth ore concentrate,being able to manufacture 10,000 tons of rare earth chloride solution (converted REO).All of the primary products are intermediate products from separation and will be provided for downstream separation production lines,instead of flowing into the market for sales.

After the pilot industrialization project gets successful, the Company will choose a good opportunity to comprehensively upgrade current high-temperature roasting process.On the same day, North Rare Earth made announcement that North China Rare Earth(Group) High-tech Co.LTD.(referred to as the Company below) plans to invest its own capital of RMB 64.3096 million in constructing “North Rare Earth national rare earth new material innovative pilot base project”.

According to information from North Rare Earth, the Company plans to invest 64.3096 million in constructing “North Rare Earth national rare earth new material innovative pilot base project”, for the purpose of:satisfying the demands of industrial application demonstration project of rare earth functional material research for the venue of pilot project;enriching and expanding technical innovation chain; further improving self-developing ability and technical innovating ability;developing high-end new products; supporting the construction of national new material innovation base; consolidating industrial validation and industrial transformation ability for laboratory scientific fruits; promoting the industry of rare earth functional materials to mid-and-high end.

This project is devoted to supporting North Rare Earth national new material innovation base project by taking into consideration integral moving of metal material research institute of Baotou rare earth research institute and PVC rare earth heat stabilizer industrial project construction, and combing the tasks of undertaking the construction of national key laboratory, National Rare Earth Functional Materials Innovation Center, Inner Mongolia Rare Earth New Material Technology Innovation Center.

Subsidiary of XTC Plans to Invest RMB 1.998 Billion in The Construction of The Production Line of Powder And Mine Alloy in Rigid Alloy Industry Park (Phase Two)

At the end of October, XTC made announcement that, considering the exiting limited space and for the purpose of further developing tungsten powder and rigid alloy business, its subsidiary, GESAC (Haicang),plans to invest RMB North Rare Earth National Enterprise Technical Center and all kinds of scientific research and innovation platforms.Consequently, overall integrated plans and arrangements will be made.

This project focuses on the construction of a comprehensive pilot base as a venue for various rare earth new material pilot demonstration projects.Currently, it is planned to construct rare earth alloy pilot production lines, including high purity rare earth and its alloy test line and light alloy test line of rare earth.After the construction is completed, the base will be equipped with the ability to test various kinds of rare earth metals and alloy products.In the meantime, there is a place reserved for producing PVC additive to the south of the plant.Supporting manufacturing facilities include power supply facilities,cooling circulating water facilities, air compression station, gas supply facilities and fire extinguishing system.

1.99808 billion in the construction of the production line of powder and mine alloy in rigid alloy industry park (phase two) in Haicang, Xiamen.

According to XTC, this project boasts the investment of RMB 1.99808 billion and is dedicated to constructing the production line being able to produce 12000 tons of tungsten powder per year, mixture of 11200 tons of mixture per year, 2000 tons of mine alloy per year, and supporting workshop, logistics center (including maintenance workshop and quality management center), and supporting life zone in the industry park.Specifically, the production line of 7500 tons of powder, 6000 tons of RTP mixture and 1100 tons of mine alloy is the relocation of the existing capacity of GESAC (Jimei).

It is estimated that the project is going to be initiated at the end of 2021, with a construction time of 3 years, and it is going to be completed by the end of 2024 (specific construction time is determined by actual situation).The relocation of the existing production line is going to kick off in the first half of 2025.It is estimated that the payback period of the project is about 8.95 years (construction time included), and financial internal rate of return after tax is 13.04%.These data is calculated based on current actual operation of the Company, and there may be some differences in the future according to actual operation then.It is suggested that investors fully pay attention to the risks.

According to XTC, as swift development has been made in rigid alloy products in recent years, the base in Xiamen for powder products is not adequate enough in terms of venue size, creating bottleneck for related process and failing to satisfy the demands for future strategic development.For the purpose of ensuring sustainable development of terminal product, the Company thinks it very necessary to expand the scale of the base in Xiamen.Meanwhile, due to the limitation of existing workshop room, the programs related to automation reform and environment improving are not able to be well implemented.The construction of new workshops will incorporate the factors of automation solutions and room reservation for automation.The Company will make reasonable workshop arrangement and introduce environment improving facilities like air supply system, so as to alleviate pressure for workers and safeguard the sustainable development for products.In addition,Phase One of GESAC Industry Park did not incorporate supporting logistics and storage facilities and life zone but Phase Two is going to incorporate these facilities.

The project, centering on relocation and expansion, is dedicated to both supplying raw material to the Company’s terminal products including rigid alloy rods, mine alloy and cutting tools and meeting the demands of longterm customers for purchasing increase, so as to ensure distribution channel.Phase Two is going to adopt existing production process that is already advanced and stable.

Refined Copper Production by Province or City in 2021 Unit: metric ton

Aluminium Production by Province or City in 2021 Unit: metric ton

Production of the Ten Major Nonferrous Metals in 2021 Unit: metric ton

Fabricated Copper Production by Province or City in 2021 Unit: metric ton

Lead Production by Province or City in 2021 Unit: metric ton

Key Financial Indicators of Non-ferrous Companies Above Designated Size

Indicator Unit Sep.2021 Jan.--Sep.2021 Change 2020-2021 Ore Grade Copper % 0.65 0.65 0.68 Lead % 2.5 2.36 2.36 Zinc % 5.07 4.78 4.85 Nickel % 0.95 1.04 1.07 Tin % 0.61 0.69 0.6 Antimony % 2.03 2.61 3.01 Tungsten % 0.3 0.3 0.27 Molybdenum % 0.11 0.09 0.1 Concentrate Grade Copper % 22.1 21.99 21.75 Lead % 58.69 59.78 60.72 Zinc % 49.59 49.42 50.24 Nickel % 6.77 6.81 6.72 Tin % 40.23 42.21 43.31 Antimony % 25.07 25.27 26.44 Tungsten % 44.57 45.56 49.82 Molybdenum % 52.03 51.87 52.52 Recovery Rate of Mineral Processing Copper % 87.67 86.86 86.32 Lead % 85.51 85.48 86.47 Zinc % 90.77 90.94 91.1 Nickel % 82.39 83.53 84.07 Tin % 78.43 71.83 68.66 Antimony % 88.67 85.91 84.06 Tungsten % 78.12 76.97 77.77 Molybdenum % 87.96 88.16 86.16 Copper Total Recovery Rate of Copper Smelting % 98.79 98.67 98.74 Recovery Rate of Refined Copper % 99.45 97.4 99.68 Recovery Rate of Blister % 99.17 99.09 99.1 Direct Current Consumption of Refined Copper kWh/ton 324.91 322.99 323.03 Current Consumption of Blister kWh/ton 765.62 717.43 715.31 Coal Consumption of Blister kg/ton 120.95 131.55 140.01 Aluminum 87.96 88.16 86.16 Comprehensive AC Power Consumption of Aluminum kWh/ton 13526.1 13522.07 13535.38 Direct Current Consumption of Aluminum kWh/ton 12862.14 12837.9 12831.83 Continued on to the next page

Source: China Nonferrous Metals Industry Association Continued from the previous page Indicator Unit Sep.2021 Jan.--Sep.2021 Change 2020-2021 Alumina Consumption of Aluminum kg/ton 1918.22 1914.36 1912.02 Total Recovery Rate of Alumina kg/ton 76.57 79.26 80.28 Soda consumption of Alumina kg/ton 137.87 132.78 141.54 Lead Total Recovery Rate of Lead Smelting % 97.37 97.24 97.24 Recovery Rate of Lead Bullion % 98.32 98.3 98.08 Coal Consumption of Lead Bullion kg/ton 400.77 311.27 245.81 Direct Current Consumption of Refined Lead kWh/ton 117.72 116.7 118.68 Zinc Total Recovery Rate of Refined Zinc % 95.95 96.28 96.3 Direct Current Consumption of Refined Zinc kWh/ton 3068.63 3046.46 3049.38 Tin Total Recovery Rate of Tin Smelting % 98.35 97.84 98.23 Direct Current Consumption of Tin Smelting kWh/ton 2185.37 1835.52 2026.57 Coal Consumption of Tin Smelting kg/ton 1415.84 1286.58 1424.54 Nickel Total Recovery Rate of Nickel Smelting % 93.76 94.31 94.46 Antimony Total Recovery Rate of Antimony Smelting % 98.23 97.63 96.64 Direct Current Consumption of Antimony Smelting kWh/ton 578.3 675.69 746.27 Yield of Processed Material Rate of Total Copper Products % 81.19 80.73 81.16 Copper Melting % 95.45 96.03 95.78 Copper Processing Products % 85.02 83.89 84.44 Rate of Total Aluminum Products % 68.47 67.67 66.72 Aluminum Melting % 89.25 89.07 89.02 Aluminum Processing Products % 76.14 75.49 79.34

Alumina Production by Province in 2021 Unit: metric ton

Yield of Ten Major Types of Nonferrous Metals By Region

Zinc Production by Province in 2021 Unit: metric ton