CHINA ANNOUNCES NONFERROUS METALS INDUSTRY SUPPORT PLAN

UNCLAS SECTION 01 OF 02 BEIJING 000661

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE,
VENKATARAMAN, KEMP, MILLER, MALMROSE
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN
(6510)

E.O. 12958: N/A
TAGS: ECON EWWT EIND ETRD CH
SUBJECT: CHINA ANNOUNCES NONFERROUS METALS INDUSTRY SUPPORT PLAN

REF: (A) Beijing 151; (B) Beijing 326; (C) Beijing 425; (D) Beijing
443; (E) Beijing 515; (F) Beijing 583; (G) Beijing 585; (H) Beijing
592

This cable is Sensitive But Unclassified (SBU) and for official use
only. Not for transmission outside USG channels.


1. (SBU) SUMMARY: China's State Council announced on February 25 a
nonferrous metals industry support plan, the ninth of ten plans to
help the country's key industries. The plan aims to control
production volumes and support technical innovations within the
nonferrous metals sector, which includes aluminum, copper, tin,
lead, zinc and other metals. An industry contact welcomed the
plan's support for industry consolidation and establishment of
national reserves of nonferrous metals while downplaying concerns
about export rebates and China's "go out" policy of encouraging
leading Chinese firms to acquire natural resources overseas. End
Summary.


2. (U) The State Council approved a new support plan for the Chinese
nonferrous metals industry on February 25 - the ninth of ten plans
for key industries. The plan covers aluminum, copper, tin, lead,
zinc and other nonferrous metals. (See reftels for reporting on
autos, steel, textiles, machinery, shipbuilding, IT/electronics,
petrochemicals, light industry and logistics.)


3. (SBU) Full of generalities and lacking in details, the plan
includes the following measures: 1) stabilize and expand domestic
markets, improve the export environment, support high-value added
exports, and adjust production to meet power, transportation,
construction, machinery and light industries' demand; 2) control
total production volume and accelerate elimination of backward
production capacity; 3) upgrade technology and improve R&D, develop
advanced technologies, and upgrade processing equipment; 4) promote
mergers and improve industry concentration levels, improve
management, work safety, and competitiveness; 5) fully utilize both
domestic and overseas resource markets; and 6) develop recycling and
improve comprehensive resource utilization. The State Council also
announced that the government would subsidize loans for upgrading
technologies, "adjust" the VAT refund rate structure, and establish
a national reserves mechanism.

Industry Welcomes Plan's Support for Consolidation, Reserves
-------------- --------------

4. (SBU) The China Nonferrous Metals Industry Association drafted
the plan, which was then reviewed and revised by the National
Development and Reform Commission (NDRC) and approved by the State
Council. According to Bian Gang, Deputy Director General of the
Association's Department of International Cooperation, the global
financial crisis and sharp drop in prices of nonferrous metals have
had a significant impact on China's nonferrous metals industry. He
said the Association, which represents more than 1000 metals
producers, welcomed the plan's support for industry consolidation.
The plan would help the Association's efforts to encourage producers
to consolidate through mergers and acquisitions, forcing inefficient
and polluting industries to leave the market and resulting in energy
savings, reduced emissions and improved efficiency. Bian said the
plan to establish national reserves for nonferrous metals would
benefit both producers and the government. The reserves would allow
the government to buy necessary metals when prices are low and use
them when prices are high. At the same time, the government
purchase of metals for reserve would help companies facing
overcapacity.


5. (SBU) Regarding the government's 4 trillion yuan stimulus
package, Bian said the nonferrous metals industry would benefit from
increased domestic demand for infrastructure projects, though not
nearly as much as the steel industry. He also noted that the
"Appliances to the Countryside" program announced as part of the
light industry support plan (ref F) would increase demand for
nonferrous metals used for the production of certain appliances.
Bian downplayed concerns about "adjustments" to the VAT refund rate
structure, arguing that the export rebate policy would only apply to
end use products made of nonferrous metals and not to the metals
themselves.

Companies "Go out" to Acquire Overseas Resources
-------------- ---

6. (SBU) According to Bian, the Association and the government
encourage nonferrous metals producers to "go out" (zouchuqu) and buy
shares of overseas resources. However, he stressed the commercial
nature of these activities, arguing that the government does not
provide financial support to these activities. In the case of
Chinalco's proposed USD19.5 billion investment in Rio Tinto (ref H),
Bian said the state-owned China Development Bank (CDB) supported the

BEIJING 00000661 002 OF 002


deal because the bank believed it would profit. He noted that
several other Chinese nonferrous metals companies - including
Jinchuan Group, Zhongjin Lingnan Nonfemet Company, and China
Minmetals Nonferrous Metals Company - had plans to invest overseas.
Bian said some members of the Association had a strong interest in
buying a U.S. silver mining company, noting the selling price of the
company had dropped to 1/10 of the original price.

Comment
--------------

7. (SBU) Although the nonferrous metals industry support plan does
not explicitly endorse the "go out" policy, its measures clearly
suggest government support for creating internationally-competitive
SOEs with the ability to acquire resources overseas. In particular,
the government's support for "promoting mergers" and "fully
utilizing both domestic and overseas markets to ensure the supply of
resources" will no doubt benefit large SOEs such as Chinalco. With
deep pockets and government backing, these SOEs will likely continue
to seek overseas investments that take advantage of low prices and
secure strategic resources.

WEINSTEIN