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China’s Guangxi mulls metal purchase plan

Guangxi’s neighbour in southwestern China, Yunnan province, said on Monday it would purchase up to 1 million tonnes of base metals and minerals and hold them for one year to help shore up prices, an announcement that briefly lifted tin futures in London by over 5 percent.

‘This is something the central government and the regional government will consider, within the context of national policy, because metals prices are indeed falling,’ said Guo, who formerly headed Aluminium Corp of China, or Chinalco, the country’s giant state-owned aluminium and alumina producer, and its listed unit Chalco.

The Yunnan plan, details of which are not yet clear, would likely involve primary metal as well as metal in ores and semi-finished products. The province also urged metals firms to stock up on copper concentrate and iron ore at low prices.

The Yunnan plan’s impact on global markets would be increased if it were joined by other large metal producing provinces, like aluminium-rich Henan in the north, analysts said on Monday.

Chinese provinces are increasingly acting unilaterally to stave off unemployment, protect their local economy and prevent social and political unrest, as the global financial crisis begins to be felt in China’s export sector.

The country’s industrial output grew by its slowest rate in almost seven years in the year through October.

‘The crisis has spread from the financial sector to the real economy. Guangxi’s development cannot escape this,’ Guo said, noting that the price of sugar, another key commodity for the poor region, was also low.

An announced central government stimulus plan would help Guangxi’s metals firms reach their output targets for this year, Guo said, without elaborating.

Guo did not specify which metals would be involved if Guangxi enacted a purchase plan. Guangxi is an important producer of alumina, aluminium, tin, indium and other minor metals.

‘Each locality could have its own approach,’ Guo added.

A big private coal mine and chemical plant owner in Guizhou, a neighbouring province to Yunnan and Guangxi, said business was really gloomy as there was almost no demand.

‘Yunnan is very aggressive in boosting the local economy. For example, the government has cut retail electricity prices by 6 cent per kilowatt and also promised to buy metals from smelters. I think other provinces should also follow the example,’ he said.

‘I’m going to submit a proposal to our provincial leaders soon. In Guizhou, coal shipped out of the province is still subject to 50 yuan ($7.26) of fees per tonne even though there is not much business at all.’

Citigroup analyst Clarke Wilkins, writing in a note to clients about a visit to China last week, said the metals and mining sector was suffering severely.

‘Everyone knows that China has slowed rapidly, but the speed at which the deceleration occurred in October has everyone a little shell-shocked,’ he wrote.

‘The government stimulus packages have made the mood cautiously hopeful things will improve, but even optimistically this was not until the second quarter of 2009.’

The State Reserves Bureau has a mandate to buy refined metals when prices are low and sell them at high prices, to help smooth out price fluctuations in China. But that body was stung in 2005, when its trader’s massive short position triggered a costly squeeze on the London Metals Exchange.