The Chinese Lead And Zinc Industry Under High-quality Development

In recent years, the Chinese lead and zinc industry has made progress while maintaining stability, realized basically balanced production and consumption, gradually optimized its industry structure, scored progress in scientific and technological innovation, continuously expanded the industry chain and international cooperation, and improved the market competitiveness. Moreover, the industry has made certain progress in transformation and upgrading and high-quality development, and successfully built several high-end green and intelligent manufacturing lead and zinc bases including Yuguang Gold & Lead, Zhuzhou Smelter Group, Chihong Zinc & Germanium, Zhongjin Lingnan Nonfemet, Hechi Nanfang and Yunxi Wenshan Zinc & Indium that achieved successful transfer and transformation. The industry’s risk tolerance has been enhanced and the economic performance of smelters has been improved. Despite that the spot average price of domestic lead and zinc declined by about 13% on a year-on-year basis and the profits during January – August of the lead and zinc enterprises above the designated size decreased by 20% on a year-on-year basis, the profit rate of the non-ferrous industry maintained at 12% - a normal level. The profits of lead and zinc smelters increased by 119% on a year-on-year basis, marking that it has gradually bottomed out.

At present, the Chinese lead and zinc industry shows four characteristics: 1. Production remains increase, with lead under structural adjustment and zinc under restorative production increase; 2. The profit structure of beneficiation and smelting is restored; 3. The consumption platform emerged, and the original consumption driver is inadequate and facing replacement pressure; 4. The industry lacks support for sustained and rapid development and earnestly seeks for transformation and upgrading and high-quality development.

In terms of production, the lead concentrate showed a slight decrease, and secondary lead proportion also showed decline. The industry’s environmental upgrading and transformation has basically completed, and the impact on primary lead production has basically been eliminated. Under the favorable policy, the secondary lead realized rapid capability increase, year-on-year production growth and insufficient utilization of capacity. During January – August, 2019, the cumulative production of lead concentrate in China reached 750,000 tons (metal), down by 3% on a year-on-year basis; the cumulative production of refined lead in China reached 3.96 million tons, up by 18.8% on a year-on-year basis, and the mineral lead production realized a year-on-year growth of 18.2%; and the cumulative production of secondary lead in China reached 1.508 million tons, up by 19.8% on a year-on-year basis. In Q3, the secondary lead production showed a rapid growth, but its proportion in the annual refined lead production showed a downtrend. The zinc concentrate production showed mitigation in year-on-year decline, and the cumulative production of refined zinc turned from negative year-on-year rate to a positive one. The secondary zinc industry scored a gradual improvement in distribution and supporting standards and policies, facilitating the stable growth of its capability and production. During January – August, 2019, the cumulative production of zinc concentrate in China reached 1.968 million tons, down by 3.1% on a year-on-year basis; the cumulative production of refined zinc in China reached 4.034 million tons, up by 8.2% on a year-on-year basis.

Despite of a big proportion in the non-ferrous metal industry, the enterprises in the Chinese lead and zinc industry showed different beneficiation, smelting and profitability, causing the imbalanced profit proportion and production proportion and high operation pressure. In 2018, the total production of six major concentrates in China reached 5.953 million tons, including 1.331 million tons of lead concentrate and 2.84 million tons of zinc concentrate (together accounting for 70% of the total production of six major concentrates); the lead and zinc beneficiation realized a profit of RMB 19.29 billion yuan, accounting for 59% of the total profit of non-ferrous metals beneficiation; the total production of ten non-ferrous metals reached 56.879 million tons, including 5.113 million tons of lead and 5.681 million tons of zinc (together accounting for 19% of the total production of ten non-ferrous metals); and the lead and zinc smelting realized a profit of RMB 2.09 billion yuan, accounting for 4% of the total profit of non-ferrous metals smelting. Based on historical data, the profit ratio of lead and zinc beneficiation and smelting is about 2:1. In 2017, the profit of lead and zinc smelting accounted for 33% of the total profit of the Chinese lead and zinc industry – a normal level. In 2018, due to short supply of zinc concentrate worldwide, the low processing fee of zinc concentrate and high pressure of lead and zinc smelting, the profit of lead and zinc smelting drastically declined to only 10% of the total profit of the Chinese lead and zinc industry. In 2019, due to sufficient supply of zinc concentrate and high processing fee of zinc concentrate, the profit of lead and zinc smelting was significantly improved. Specifically, during January – August, the profit of lead and zinc smelting reached RMB 4.15 billion yuan, up by 119.2% on a year-on-year basis and accounting for 38.7% of the total profit of the Chinese lead and zinc industry – a high level recently; and the profit of lead and zinc beneficiation reached RMB 6.58 billion yuan, down by 42.8% on a year-on-year basis due to low price.

At present, the lead consumption platform has emerged in China. Lead-acid batteries, which account for 86% of the total lead consumption in China, are facing the pressure of being replaced by new energy batteries including lithium ion batteries in the traditional consumption segments as automobiles, e-bikes and telecommunication base stations. Moreover, thanks to the good recyclability of lead, the secondary lead production proportion has showed an increase trend with the increasing cumulative consumption of refined lead, posing pressure on the consumption increase of primary lead. Despite of the dual pressures of the new energy industry outside and secondary lead industry inside, it still takes a long time to release the replacement effect. During January – August, the cumulative production of lead-acid batteries in China reached 129 million kvah, up by 4.5% on a year-on-year basis, with slight increase in primary consumption; the cumulative production of automobiles in China reached 15.924 million, down by 12.5% on a year-on-year basis, with insufficient lead consumption; due to significant decrease in subsidy in 2019, the production and sales of new energy vehicles declined for 3 consecutive months, and reached 89,000 and 80,000 respectively in September, down by 29.9% and 34.2% on a year-on-year basis. As the main purchasers of new energy vehicles are not individuals, it may be difficult to meet the sales target of 1.6 million in 2019. At present, the production of new energy vehicles accounts for less than 6% of the total auto production in China. As for the lead consumption in e-bikes, as the Safety Technical Specification for Electric Bicycle was officially implemented on April 15, non-conforming e-bikes will not be registered and used since December 31, 2021. During the transition period from 2019 to 2021, local governments at all levels will implement supporting management policies. Based on the development trend, the proportion of lithium-ion e-bikes is expected to increase gradually. During 2013 - 2018, the proportion of lithium-ion e-bikes has increased from 6.7% to11.4%, which is expected to further increase in 2019. However, the management policies are implemented more strictly in first-tier and second-tier cities than third-tier and fourth-tier cities. On the other hand, the zinc consumption showed a slow growth trend. Zinc is mainly used in galvanization, zinc die cast alloy and zinc oxide. Thanks to the anticorrosion performance, galvanization is extensively used in construction, auto and home appliance industries. Currently, as China is in the critical period to transform from rapid development to high-quality development, the overall consumption of infrastructure, real estate and real estate-related auto and home appliance industries is insufficient, causing the low consumption in zinc.

The production and sales of the Chinese lead and zinc industry has ranked No.1 worldwide for consecutive years. In 2018, the global refined lead consumption was 11.734 million tons, and the refined lead consumption in China was 4.974 million tons, accounting for 42.4%; the production of refined lead in China was 4.825 million tons, accounting for 41.5%; and the production of lead concentrate in China was 2.078 million tons, accounting for 44.6%. In 2018, the global refined zinc consumption was 13.663 million tons, and the refined zinc consumption in China was 6.49 million tons, accounting for 47.5%; the production of refined zinc in China was 5.73 million tons, accounting for 43.2%; and the production of zinc concentrate in China was 4.42 million tons, accounting for 34.3%. In terms of production and sales proportions, the demand for zinc concentrate is more urgent than that for lead concentrate, so the supply trend of zinc concentrate has a big effect on the profit of the Chinese lead and zinc smelting industry. Besides, in recent years, the global consumption of lead and zinc has been driven by the rapid development of the lead and zinc consumption in China, and the latter relies on the rapid development of Chinese economy. In the current economic development environment in China, due to weak demand, the sustained and rapid development of the lead and zinc industry lacks strong support, posing increasing pressure on industry transformation and upgrading.

Environmental protection is critical to guarantee the sustainable development of a nation. With the increasingly sound laws, regulations and policies, the Chinese lead and zinc industry is facing increasingly high environmental requirements. Environmental protection has become the development lifeline of lead and zinc industry. In April 2018, the Ministry of Ecology and Environment issued the Opinion on Strengthening the Pollution Prevention and Control of Heavy Metal Industry (HTR [2018] No. 22), which proposed to reduce the total emission of heavy metal pollutants by 10% by 2020 compared with that in 2013; and the special emission limits on air pollutants of 2+26 cities, waste elimination action in Yangtze River Economic Zone and environmental governance action in Fenhe-Weihe Plain have brought in tougher heavy metal pollution control tasks and expanding environmental governance scope. The above regulations have a wide influence on the Chinese lead and zinc industry. Based on preliminary statistics, the policy covers up to 90% of the lead smelting capacity and 65% of zinc smelting capacity of the provinces affected, and covers up to 80% of secondary lead smelting capacity of the Yangtze valley. Currently, the ecological civilization construction has been incorporated in the Constitution of the People's Republic of China, the prevention and elimination of major risks, targeted poverty alleviation and pollution control have been highlighted in the report of the 19th National Congress of the Communist Party of China; MIIT has issued the Guidelines for the Green Manufacturing Standard System Construction and NDRC has issued the Green Industry Guidance Catalogue, making green development and energy efficiency a prerequisite for the development of Chinese industry and manufacturing industry. As a major component of the Chinese non-ferrous metal industry, the lead and zinc industry is featured by relatively low industrial concentration, scattered capacity layout and high pressure on heavy metal pollution control. Therefore, the increasingly stricter environmental standards have brought in both challenges to the Chinese lead and zinc industry and opportunities for it to deepen transformation and upgrading and improve industrial competitiveness.

During 2003 – 2010, with the rapid development of the Chinese economy, both the beneficiation and smelting investments in the Chinese lead and zinc industry showed a rapid growth trend. After 2011, by leveraging the advantages of the second largest lead and zinc resource reserve worldwide, high support capability for lead and zinc resources and strong market demand, the beneficiation investment was higher than the smelting investment, which played a crucial role in guaranteeing the reasonable resource self-sufficiency and optimal utilization of the domestic market and international market. During 2016 – 2018, fixed-asset investments in lead and zinc beneficiation and smelting showed continuous decline, with different internal causes. In 2018, the beneficiation investment of the Chinese lead and zinc industry reached RMB 23.75 billion yuan, down by 2.7% on a year-on-year basis, and the smelting investment reached RMB 14.44 billion yuan, down by 20.9% on a year-on-year basis. The decline in beneficiation investment was attributed to the successive shutdown of non-conforming mines since the environmental governance action was launched in 2015, and the downturn of the global mining industry and the mining exploration and exploitation in China; and decline in smelting investment was attributed to the reluctance of the smelters to increase capacity. After nearly 20-year development, the capacity configuration of the Chinese lead and zinc industry has reached saturation, and as the lead and zinc consumption gradually enters the plateau, the smelters have fully realized that simple increase in size results in no additional economic benefits, so they shifted the smelting investment from new capacity to comprehensive utilization of resources and harmless disposal of hazardous wastes, etc.

The Chinese lead and zinc industry has entered a stage of standard management. From the issuance of the Lead and Zinc Industry Access Conditions in 2007 to the issuance of the Lead and Zinc Industry Standard Conditions in 2015, 5 mines, 13 lead smelters and 14 zinc smelters have become standard enterprises, accounting for 39% of the total lead smelting capacity and 35% of the total zinc smelting capacity. The demonstration and guidance effects of the standard enterprises have played an exemplary role in promoting technical progress and improving equipment of the Chinese lead and zinc industry, with increasingly improved industry concentration - the number of beneficiation enterprises above the designated size has reduced from 491 in 2015 to 328 in 2019, and that of smelting enterprises above the designated size has reduced from 365 in 2015 to 267 in 2019. To further consolidate the transformation achievements of the Chinese lead and zinc industry and encourage the high-quality development of the industry, MIIT entrusted the industry associations to amend the Lead and Zinc Industry Standard Conditions (2015), which will treat equally the new and old enterprises without discrimination - all standard enterprises will be reviewed based on the same standards, elevate the review indicators and propose new requirements for hazardous waste disposal and comprehensive and recycled utilization of resources.

As for other aspects of the industry management, according to the exposure draft of the Interim Measures for Management of Lead Battery Recycling, the standard recycling rate of lead batteries should reach over 60% by the end of 2025; with the successive issuance of the regulations as the National Hazardous Waste Catalogue, Measures for Management of Hazardous Waste Transfer Form, Zinc Oxide Concentrate for Zinc Smelting standard and harmless disposal of residue from zinc hydrometallurgy, the standard management of hazardous wastes, solid wastes and secondary materials also gained attention, which played a positive role in promoting the high-quality development of the Chinese lead and zinc industry.

Efficiency increase depends on quality improvement. Proper implementation of the due work and improvement of comprehensive strength are means to realize the high-quality development. The decline in scale advantage, together with the rigid rise in operation costs of environmental protection, labor and logistics of the Chinese lead and zinc industry, has driven the enterprises to pay more attention to the comprehensive recycling of resources and residues, in order to realize the prudent operation via potential release and efficiency improvement. Yuguang Gold & Lead, China Minmetals and Hechi Nanfang, etc. have built a copper-lead-zinc combined smelting system to realize the efficient recovery of valuable metals across systems and improve profitability. Zhongjin Lingnan, Xiangyun Feilong and GREENNOVO, etc. have extended their industry chain and implemented concentrated disposal of secondary materials, in order to guarantee the green development of the industry and vitalize the economic value of secondary resources. The sulfur dioxide reduction leaching-hematite deironing and zinc smelting process (the first in China and the second worldwide) developed by Yunxi Wenshan Zinc & Indium has scored remarkable benefits, which can not only improve indium recovery but also realize the minimization and recycling of iron cakes, thus significantly improving its profitability and competitiveness. Outstanding lead and zinc enterprises are realizing better development and backward enterprises will be phased out – a signal of high-quality development of the Chinese lead and zinc industry.

The secondary lead and zinc industry is under orderly and sound development. Specifically, the secondary lead industry in China is developing rapidly. Affected by the policy of Extended Producer Responsibility System, the lead-acid battery enterprises are actively entering the secondary lead industry through new plant construction, acquisition of existing secondary lead enterprises and cooperation with existing secondary lead enterprises. Based on preliminary statistics, the dismantling capacity of the waste lead-acid batteries has exceeded 10 million tons in China. The rapid expansion of secondary lead capacity has a positive effect on the industry, but the excess capacity risk should be avoided. Currently, the recycling channel of waste lead-acid batteries is still in the construction and improvement stage, and the existing primary lead smelters may also fully leverage the secondary lead resources (lead paste, etc.) during their process transformation. Hence, the failure to form effective synergy between the primary lead and secondary lead enterprises may intensify the competition within the lead industry. Based on the development trend, the primary lead enterprises have certain advantages in terms of equipment, technology and environmental protection, and the in-depth cooperation between the primary lead and secondary lead enterprises may bring it the advantages in terms of recycling of waste lead-acid batteries and recycling channel, etc., in order to complement each other to promote the high-quality development of the lead industry. Besides, the development of secondary zinc industry is closed related to the development of iron and steel industry. The effective utilization of secondary materials (blast furnace dust and electric hoist dust, etc.) containing zinc not only gives play to the role of technology and equipment advantages of secondary zinc industry but also effectively solve the problem of disposal of contaminants in iron and steel industry, thus realizing the resources recycling and the integrative development of non-ferrous metal industry and iron and steel industry.

Enhanced industry integration is another important means to promote the high-quality development. Currently, the integration of upstream-downstream industries is making steady progress. The integration between mine and smelting, primary and secondary, iron & steel and non-ferrous metals, and enterprises and institutes, etc. represents the latest development trend of the Chinese lead and zinc industry. Moreover, the integration between the government and enterprises is also one of the important means to smooth the government management channel, solve the actual problems of enterprises and jointly guarantee the steady and efficient development of the Chinese non-ferrous metal industry. The amendment of the Lead and Zinc Industry Standard Conditions (2015) is fully listening to the voice of industry enterprises. The enterprises actively cooperates with the government regulation, and assist in the preparation of the industry standard Zinc Oxide Concentrate for Zinc Smelting based on the industry status, in order to improve industry management chain and carry out business in a compliant and legal manner. The integration between enterprises can not only earnestly promote the communication and win-win through benchmarking and collaboration, but also realize the effective integration of existing industry through M&A and reorganization. Zhongjin Lingnan’s acquisition of Perlia Lead & Zinc Mine in Australia and China Copper’s acquisition of Yunnan Metallurgy Group, etc. have significantly improved the international influence of the Chinese lead and zinc industry, thus enabling the industry enterprises to participate in international competition confidently and promote the implementation of the high-quality development strategy of the Chinese lead and zinc industry.

However, when Jinchuan was developing the acquisition proposal, another company sent a tender offer notice to project owner. Faced with the emergency, Jinchuan carried out comprehensive evaluation of the project and finally decided to acquire Tyler Resources Inc. via tender offer.

After completing due diligence, tender offer and government review, Jinchuan Group acquired Tyler Resources Inc. at a price of USD 161 million, and thus held the full ownership of Bahuerachi copper mine. Upon the completion of the acquisition, Jinchuan invested in intensive exploration, geological prospecting, pre-feasibility study and feasibility study. At present, Jinchuan is developing a new plan to seek strategic investors for the joint exploitation of the copper mine.

Based on the experience of acquisition of Bahuerachi copper mine in Mexico, Jinchuan Group acquired another five overseas mining companies successively. So far, Jinchuan Group boasts 10 non-ferrous metal mines. Specifically, Metorex in South Africa owns 5 non-ferrous metal mines, 2 of which have realized safe production and operation; Jinchuan WP＆RKA in Indonesia is implementing the laterite nickel ore exploitation project, which has produced ores since November 2017; and Wesiswe platinum project in South Africa is under construction and is expected to realize an annual capacity of 600,000-ton platinum by 2021.

According to Wang Yongqian, in the next stage, Jinchuan will actively respond to the Belt and Road initiative, and continues to acquire high-quality mineral resources via mergers and acquisitions. Particularly, Jinchuan will establish resources sites in Africa and Southeast Asia to support and secure the main business of Jinchuan Group.

According to Li Weiqiang, an industry expert at Zijin Mining Group Co., Ltd., with the surge of domestic demand and increasingly fierce market competition of the mining industry, many Chinese enterprises are shifting to overseas resources projects successively, making overseas mergers and acquisitions a good choice to guarantee domestic resources supply.

In addition, the cooperation with many international banks facilitated the overseas business of Jinchuan Group. In order to complete overseas mergers and acquisitions, Jinchuan maintained close cooperation with Goldman Sachs, Bank of Montreal, Morgan Stanley, Merrill Lynch, Standard Chartered Bank and other investment banks, which facilitated the international capital business of Jinchuan as international assets injection and overseas issuance of RMB. As of the end of June 2019, Jinchuan Group boasted an overseas direct investment of USD 2.1 billion and 2,825 overseas employees.

In the 2019 FORTUNE Global 500 list, Jinchuan Group ranked the 369th place.