Inventory Surged More Than 60% in the Nonferrous Metals Industry in the First Half of 2012

In the first half of this year, in the nonferrous metals industry listed companies’ inventory grew 63.46%. To some extent, changes in the inventory data of finished products mirror changes in the mutual dependence of suppliers and buyers, and changes in companies’ inventory often reflect future changes in industry prosperity.

According to data from listed companies’semi-annual financial statements, prosperity of the nonferrous metals industry declined in the first half of this year. Decreased downstream demand leads to a decline in the profit of most enterprises in the industry, which exerts significant pressure for enterprises in production.Inventory of nonferrous metals keeps rising.

According to data from Securities Daily, in Shenyin Wanguo Securities’ list of nonferrous metals companies, 52 listed companies in the industry have publicized their semi-annual financial statements for 2012, among which 33 companies posted a YOY rise in inventory, taking up as much as 63.46% in the total.

Among the 33 listed companies, Chalco had the largest inventory in the first half of 2012,26,421 million yuan. Yet as it had inventory worth as much as 22,325 million yuan the same period last year, the YOY growth rate was not high. According to its semi-annual report,Chalco suffered a loss of 3,253 million yuan in the first half of this year. The company’s posted earnings of 413 million yuan for the same period last year. The company attributed the drop in net profit largely to falling selling prices of its main products while rising costs of raw materials and power led to a decrease in the gross profit margin on sales of its main products. As aluminum prices remain low, the company is expected to post a loss for the first three quarters.

Jinma Group posted the highest growth rate of inventory, 8186%. For the first half of this year, it posted inventory of 359 million yuan,compared with merely 43,276,700 yuan last year. As for raw materials, it can market its own products. Therefore, a sharp increase in inventory did not slow down the growth of profit. For the first half year, Jinma Group earned 426 million yuan, edging up 2.68% year on year.

Compared with other companies in the industry, in the first half of this year the rare earth concept sector was the hardest hit part in terms of inventory. Among the more than 20 listed companies that have publicized their semiannual reports, Baotou Steel Rare Earth, which is a leading enterprise in the north, has a larger inventory than any other company in the sector in 2012. For the first half of 2012, Baotou Steel Rare Earth posted a staggering inventory of 6,674 million yuan, compared with 3,879 million yuan the same period last year, up 72.08%.Red Star Development, JPMF Guangdong Co.,Ltd., Taiyuan Twin-Tower Aluminum Oxide Inc. and Dingli Technology all posted growth rate of inventory of more than 30%.

An industry analyst who spoke on condition of anonymity, told a reporter with Securities Daily: “Stock prices in the rare earth sector generally declined in the first half of this yea,which is largely ascribable to the uncertainty of the prices of rare earth. Due to the low prices of rare earth, downstream processing enterprises’profit received direct impact. In 2011, rare earth enterprises generally performed well,which is a sharp contrast to their performance this year. Along with the decline in profit, enterprises came under greater pressure in production. And decreased orders resulted in a universal increase in enterprises’ inventory.”

According to statistics, as of August 29, a total of 24 listed companies in the rare earth industry had disclosed their semi-annual results. Six of them suffered a loss, and seven of them experienced a significant drop in their performance.

Neither Baotou Steel Rare Earth, which used to be dubbed as industry benchmark, nor Rising Nonferrous Metals posted satisfactory mid-year results. Baotou Steel Rare Earth experienced a 20.59% YOY decline in net profit; net profit of Rising Nonferrous Metals plunged 92.99% year on year. Apart from this, industry leader Chalco posted a staggering loss of 3,253 million yuan for the first half year. Tibet Galaxy Science & Technology Development Co., Ltd.,which is a new entrant in the industry, posted profit of merely 9,456,400 yuan for the first half of this year, down 28.42% year on year.

However, despite the grim industry environment, Zhong Ke San Huan, Ningbo Yunsheng and Dingtai Rare Earth & New Material all posted increased net profit for the first half of this year. During the reporting period, Zhong Ke San Huan’s total operating income came to 2,845 million yuan, up 59.78% year on year from last year; net income attributed to the listed company’s shareholders rose 196.48% to 460 million yuan. Ningbo Yunsheng’s net profit came to 290 million yuan for the first half of 2012, increasing 1.5 times year on year. As its subsidiary’s 60,000-ton high-rail PC product project was put into production, Dingtai Rare Earth & New Material saw a hefty rise in its main business income. In the first half of this year, it posted operating income of 396 million yuan, with a YOR increase of 47.3%; net income attributed to the listed company’s shareholders grew 10.63% year on year to 24,152,000 yuan.

Among the three listed companies posting encouraging results, Zhong Ke San Huan and Ningbo Yunsheng posted a YOY decline in inventory, inventory rate dropping 16.17% year on year for Ningbo Yunsheng and 16.88% for Zhong Ke San Huan.

“Data show that inventory is concentrated in upstream raw material suppliers. In the second half of this year, they urgently need to ”destock“. Price is one factor, and another factor lies in the overseas markets,” said the above analyst.

The analyst’s concerns are justified. At present, rare earth prices face uncertainty. The U.S. has re-launched production of rare earth ore, and annual production capacity is expected to reach 20,000 tons next year. A rare earth plant set up by Australia in Malaysia will have production capacity of 20,000 tons. China exports 30,000-50,000 tons of rare earth, which accounts for more than 90% of the world’s total rare earth supply. Therefore, the re-launch of rare earth production abroad leads to an increase in rare earth supply, which may have impact on China’s rare earth industry. In the second half of 2012, the “destocking” process in the rare earth industry will remain very hard.