Tungsten: Balance between Demand and Supply

In 2011, the tungsten market remained basically consistent with macro economic trends. In the first half of 2011, under the backdrop of upward economic situation, tungsten export and domestic consumption grew significantly and tungsten enterprises achieved remarkable economic benefits. However, as European debt crisis deepened in the second half of 2011, the global economic growth slowed down and tungsten consumption and export markets began to shrink. Especially, after September 9,2011, the tungsten market worsened rapidly with slump of export volume and consumption,and the price also began to fall. Nevertheless,in 2011, tungsten price hit a record high on the whole and fluctuated at high levels, and profit of the industry rose notably. In despite of the sluggish macro economy in 2011, tungsten bettered other nonferrous metals in terms of price.

In 2011, the annual average price of black tungsten concentrate stood at RMB 139,000/ton, up by 65% y-o-y compared with RMB 84,000/ton in 2010.

In 2011, China produced 121,966 tons of tungsten concentrate, up by 5.97% y-o-y, and imported 9,225 tons of tungsten ores, up by 50.11% y-o-y.

In the first half of 2011, spurred by improvement of domestic and international economic situations, hard alloy companies continued to achieve significant growth in terms of output and economic benefits. During the period,China’s actual output of hard alloy stood approximately at 12,500 tons, up by 25% y-o-y.However, China’s hard alloy output has declined significantly q-o-q since the 3rd quarter of the year as a result of global credit crisis and domestic economic slowdown. Nevertheless,for the first three quarters, China still achieved a cumulative production of 17,500 tons of hard alloy, up by l7% y-o-y. In the 4th quarter of 2011, as a result of China’s tightening of monetary and credit policies as well as the worsening international credit crisis, China’s economic growth slowed down noticeably. Therefore, the output of the hard alloy industry in the 4th quarter was likely lower than that of the same period of the previous year. In 2011,China’s hard alloy output stood at approximately 23,000 tons, up by 5% y-o-y, and the tungsten consumption stood approximately at 17,000 tons.

According to the data released by the China Special Steel Enterprises Association, between January and November 2011, China produced 89,946 tons of steel for high-speed tools, up by 24% over the 72,251 tons of the same period of the previous year. It was estimated that tungsten consumptions for tungsten materials, tungsten chemical industry and special tungsten steel would go up by 10%, or 20,000 tons, and the total tungsten consumption would be 37,000 tons.

According to statistical data of the China Tungsten Industry Association, in the first half of 2011, 89 tungsten enterprises achieved RMB 37.32 billion of sales revenue, RMB 4.26 billion of pre-tax profit and RMB 3.11 billion of profit, up by 52.17%, 92.23% and 132.72% yo-y respectively. Profits of mining enterprises,smelting enterprises and hard alloy enterprises grew by 282.36%, 73.60% and 53.38% y-o-y respectively. Since the 3rd quarter of 2011, the growth of economic benefits slowed down somewhat due to downslide of domestic consumption and export. However, on the whole, it is estimated that sales of the industry would top RMB 70 billion for the year, up by 40% y-o-y.

In 2011, as enterprise collaboration and convergence improved, cohesive affinity of the tungsten industry played a greater role. On one hand, China’s tungsten product quota was gradually establishing its leading position in the global tungsten trade market. In 2011, Chinese tungsten concentrate quota was specially added to MB quota. On the other hand, foreign enterprises paid more attention to changes of the Chinese tungsten market. Throughout the year, the global tungsten price resonated with domestic tungsten price, which contributed to profit improvement of smelting companies. For example, in 2009 the average export price of tungsten was even lower than cost price. The situation was slightly improved in 2010 and was completely changed in 2011. Compared with the highest price of 2005, the highest tungsten concentrate price hit RMB 158,000/ton in 2011, up by 17%, while the European APT price reached USD 485/ton, up by 70%. It shows that some profit margins of smelted products that have been taken by foreign buyers have been unleashed.

Based on the pessimistic expectations for the macro economy, we don’t think that the demand for tungsten will change greatly in the first half of 2012. However, if the global economy recovers moderately in the second half of 2012, the global demand for tungsten is expected to rise. It is estimated that export and domestic consumption of tungsten in 2012 will remain basically the same with that in 2011. As tungsten price went up continuously during the period of 2010-2011, tungsten concentrate output did not experience substantial growth, fully demonstrating that it would take 2-3 years to complete a new project. Due to the gloomy outlook for the tungsten market in 2012, we consider that tungsten output is unlikely to rise,and 2012 will continue to witness the state of balance between supply and demand.

In 2011, tungsten companies made great profits. With strong financial strength, they were capable of jointly resisting sharp price fall. In addition, industrial association and flagship enterprises played a positive role in guiding the tungsten market, making tungsten price show certain resilience. It is expected that price will not drop sharply in the first half of 2012 even in a gloomy market. If the market improves in the second half of 2012, foreign enterprises will replenish tungsten reserve. China’s economy slows down, but still shows growth. Therefore,tungsten price is expected to continue to rise in the second half of 2012.

Optimistically, we predict that in 2012 China’s average price of tungsten concentrate will stand at RMB 155,000/ton and the European average price of tungsten (APT) will reach USD 490/ton.