China Plans to Boost Metals Reserves Amid Commodities Glut

Updated on
  • State Council sets guidelines for capacity cuts, tax breaks
  • Copper leads metals gains with 1.9% surge in Shanghai

China, the world’s top consumer of base metals, will boost stockpiles, accelerate the closure of excess capacity and provide tax breaks for producers as the country grapples with a raw-materials glut amid the slowest growth in decades.

The nation will increase reserves of some metals and study a trial program for companies to build stockpiles in addition to their inventories, according to State Council guidelines posted on its website Thursday. China already holds stockpiles of metals though the State Reserve Bureau. The statement from China’s cabinet didn’t specify a timeline or say how the plan would be financed.

China has set a priority of shuttering surplus industrial capacity as the country shifts from a capital-intensive to a consumption-led economy after commodities prices collapsed because of oversupply. Domestic smelters late last year pledged to cut output as metal prices fell to the lowest in six years.

“Base metals demand remains weak amid the global economic slowdown,” the State Council said in the statement. “Structural overcapacity and imbalance in demand and supply are emerging in the metals industry.”

Encourage M&A

The country will encourage mergers and acquisitions across industries, regions and among state-owned and private companies to eliminate outdated metals capacity, according to the statement. The plan reiterates the broader goals of China’s so-called supply-side reforms, including limits on new industrial capacity. It also calls for an increase in the aluminum smelting capacity utilization rate to above 80 percent, and a boost to metals usage in transportation and building materials. 

“The guidelines have boosted market sentiment. Increasing stockpiles, especially state reserves, will support prices,” Li Wei, an analyst with Huatai Futures Co., said by phone from Shanghai. “It will more affect metals with the biggest surplus, such as aluminum. For copper, there isn’t that much outdated capacity to eliminate, but limits on new capacity will help ease downward pressure on prices. ”

Copper jumped as much as 1.9 percent on the Shanghai Futures Exchange, the biggest intraday gain since April 25, before trading 0.5 percent higher. Aluminum rose as much as 0.8 percent.

Support Financing

China will encourage metal companies to invest abroad in line with its “One Belt, One Road” initiative, and will support the financing of overseas projects, according to the statement. It also plans to speed up reforms that will give tax breaks to domestic miners and take measures to encourage exports of refined metals derived from imported ore, like copper and tin.

While the proposals aren’t new and have circulated in industry and policy circles, coming from the State Council means their importance has been upgraded, said Yang Changhua, senior analyst at Beijing Antaike Information Development Co.

China’s waning infrastructure boom has left it stuck with too much capacity after decades of growth. The steel industry, in particular, has drawn fire from competitors for exporting its surplus, stoking trade tensions and hurting profits.

— With assistance by Winnie Zhu

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