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            20 years of history but does it have a future?

            Data:2014-01-02 19:37hit:84

            When Yin Hua borrowed 120 tonnes of cobalt metal from China’s state reserve bureau in 1989, he could not have imagined that he would help start a new industry inChina.

            At the time, Yin was head of the materials bureau of Yixing, a small city inJiangsuprovince. He found that there was demand for cobalt metal from three state-owned hard carbide makers.

            “They just didn’t have the guts to import the minor metal directly from the international market, while Jinchuan Group hadn’t started cobalt metal production at the time,” Yin said.

            Thanks to his position and industrial connections, Yin was able to borrow cobalt metal from the state reserve at an annual cost of 6%, meaning he had to give 7 tonnes of cobalt metal back to the bureau at the end of the year as interest.

            Three years later, the 120 tonnes of cobalt metal had become 300 tonnes, as Yin was able to sell the metal at $20 per lb, and then buy more from the overseas market at around $11 per lb.

            Golden age
            The years before 2002 were a golden age for China’s cobalt metal importers, as they just needed to import cobalt metal then sell it to hungry domestic users, mainly hard carbide and ceramics makers.

            Yin aggressively stockpiled cobalt metal in 1999 after the Asian crisis, and in 2001 after the 9/11 terrorist attacks on theUSA, when cobalt prices dipped to as low as $5.80 per lb. His company,ShanghaiXiashang Trading, itself imported 1,500 tonnes of cobalt metal fromEuropeand the Democratic Republic of Congo (DRC) between 2001 and 2002.

            Some regarded these low-priced cobalt stocks as a starter reserve forChina’s cobalt industry, as more than one market participant raised enough money to set up their own refineries, and later began trading the material.

            People also started importing cobalt product and raw materials around that time, including Shao Baixuan, who in the mid 1990s was among the first to import cobalt concentrate and who set up Zhejiang Galico Cobalt & Nickel Material in 2004.

            Cuban connection
            In southernChina, Ning Yathoi, chairman of Hoi Mor Industrial, flew toCubanine times in 1998 and 1999 as he tried to source cobalt products from there for sale to the Jinchuan Group,China’s biggest cobalt producer.

            However, his first cobalt product deal resulted in him losing 20 million yuan ($3.2 million).

            “Cobalt prices plunged to $7-8 per lb from $17-18 [during the period], and there was nothing we could do but sit and watch the falls, due to the lack of hedging tools,” Ning said in his sea-view office in Hong Kong.

            As a result, Ning changed his business to work as Jinchuan’s import agent for the purchase of cobalt product.

            More importantly, the experience prompted him to look upstream and set up the Hong Kong Mining Exchange later on, as “it is meaningless to talk about an industrial chain or consolidation without raw material resources, no matter how big a refinery is”, Ning said.

            Boom
            In October 1999, the China Nonferrous Metals Industry Assn (CNIA) held the first annual nickel and cobalt conference inShanghai.

            “About 200 delegates attended the conference, much more than the expected attendance of 80-100,” Xu Aidong, general secretary of the cobalt branch of CNIA, said.

            The conference unleashed the boom in China’s cobalt sector over the next decade, as more people became aware of the minor metal, and some decided to become more involved through importing raw materials for local smelting.

            The boom also came amid a decade of fast growth inChina’s local economy, and changes in the global cobalt market that resulted in sharp fluctuations in cobalt metal prices.

            Threshold year
            AfterChinajoined the World Trade Organisation in late 2001,China’s cobalt industry looked forward to 2002 as a “threshold” year.

            “Many started importing cobalt concentrate to produce chemicals, which resulted in surges in imports and output in the following years,” CNIA’s Xu said.

            Around the time, a number of cobalt refineries were established. The list includes major entities such as Ganzhou Yihao Umicore Industries, a joint venture with investment from Umicore, and Yantai CASH in 2001; Huayou Cobalt in 2002; Jiangsu Cobalt Nickel Metal (KLK) in 2003; Zhejiang Galico Cobalt & Nickel Material, Ningbo COBOT Cobalt & Nickel and Ganzhou Tengyuan Cobalt Industrial in 2004; and Nantong Xinwei Nickel & Cobalt Hightech Development in 2005.

            They were just in time to hail the bull run in the cobalt market – cobalt metal prices kept rising to around 900,000 yuan ($144,000) per tonne in the Chinese market.

            “The wildest joke or speculation at that time was that the metal would reach 10 million yuan [$1.6 million] per tonne some day,” Jerry Shao, president of Galico, said.

            Inherent defect
            He followed his father, Shao Baixuan, and stepped into the cobalt industry in the 1990s, when the elder Shao was working in the state-owned materials bureau ofNingbo, a city inZhejiangprovince.

            But the Chinese cobalt industry was born with an inherent defect – a lack of cobalt resources. Refineries have been importing almost all the raw material for production, and many have made great efforts to secure their supplies.

            When Jerry Shao visitedAfricain 2005, he found it hard to settle down in a hotel room charging $300 per night. “There was no spring in the mattress, and you had to crouch down to get some water for a shower,” he recalled.

            But he soon found that that was not the hardest part of his visit, as mines there refused to trade concentrate with him, dealing only with European companies. “Some even shouted at us,” Shao said.

            It was not until 2006 that Huayou and Jiayuan Cobalt went toAfricafor investment.

            Chen Xuehua, chairman ofChina’s biggest cobalt chemical producer, Huayou, found it needed more than money and time to make the investment successful. “The biggest challenges we met there were culture differences. It is about values,” Chen said.

            It took Huayou years of work before its African operations ran smoothly, as they put great effort into communicating with local staff, improving employee welfare and helping various local charity projects.

            Going upstream
            InHong Kong, Ning Yathoi set up Hong Kong Mining Exchange in 2010.

            “Almost all Chinese refineries are processors. It is hard for them to secure raw materials, let alone have any pricing power,” Ning said. He advocated that Chinese companies purchase more upstream assets.

            One year later,China’s biggest cobalt maker, Jinchuan Group, purchased Metorex among other efforts made to secure a stable raw material supply.

            As previous crises aided Yin Hua, the 2008 global financial crisis provided good opportunities for new market participants such as Shanghai Greatpower Industry to enter the industry.

            “We bought a shipment of cobalt concentrate at the end of 2008 at very low price, as the original buyer broke the deal,” Greatpower president Aaron Cao said.

            The company was then able to clinch import deals with major miners and imported about 20,000 tonnes of cobalt concentrate in 2009, as a number of Chinese refineries failed to honour their purchase contracts in the bleak market.

            In 2011, just one year afterChinabecame the world’s biggest exporter and the second-largest importer of cobalt, its cobalt concentrate imports peaked at 348,926 tonnes, more than eight times the volume imported in 2002 of 41,000 tonnes.

            During the same 2002-11 period, the cobalt content of China’s cobalt product surged by more than ten times to 37,000 tonnes from 3,500 tonnes, while its consumption of cobalt metal grew to 29,000 tonnes from 5,800 tonnes, mainly thanks to growth in production of battery material, according to data from the CNIA.

            Turning point
            A turning point came in 2012, whenChina’s cobalt concentrate imports plunged by 49.4% to 176,205 tonnes.

            Behind the scenes, cobalt prices kept sliding for years, and many Chinese cobalt market participants had no choice but to be embroiled in a price war.

            “If you don’t sell [at low prices], you are waiting for death, and if you do sell, you are looking for death,” a major cobalt chemical producer said, describing the situation at the time.

            Moreover, failing to secure low-priced raw materials, many smelters recorded huge losses and they struggled for bailout.

            In early 2011, state-owned China New Era Group bought into Zhejiang-based Qingfeng Cobalt Alloy to become the biggest shareholder. The acquisition kicked off a period of industrial consolidation, which is still continuing.

            The next year, KLK decided to sell 51% of its stake to Shenzhen-based GEM, while many others either reduced production or simply halted operations.

            “Blind expansion inChina’s cobalt industry has been checked, and some have asked us for help, as they are looking for potential buyers for their cobalt businesses,” a CNIA cobalt branch official said in April 2013.

            The “gold rush” has passed forChina’s cobalt sector, and a few major survivors are expected increasingly to dominate the market in the next few years.

            By 2012, output of the top ten producers accounted for 82% ofChina’s total production, the figure having quickly risen from 61% in 2010, according to CNIA cobalt branch data.

            The survivors, however, still face a bumpy road ahead in the face of a more consolidated global cobalt industry.

            Outlook
            Discussion now concerns whether Chinese smelters should quit metal production and return to being net importers of cobalt metal, or end up as cobalt chemical makers.

            “Chinese smelters must quit cobalt metal production. For those with upstream resources inAfrica, their costs are much lower, and there are no freight charges at all. These strengths are unbeatable,” Greatpower’s Cao said.

            Greatpower’s cobalt metal imports have risen to 100 tonnes per month in 2013, from 20 tonnes per month in 2009. And Cao plans to further increase import volume next year.

            Major Chinese cobalt metal smelters are indeed mulling production cuts for 2013, as “it is not viable to make metal here any more”, one smelter said.

            For cobalt product makers, the availability of stable and reasonably priced raw material will remain a top priority.

            “It is meaningless for Chinese cobalt refineries to just merge with each other, unless they have low-priced and stable raw materials or secure upstream resources,” Ning said.

            While a few market participants still hope for a rebound or recovery in cobalt metal prices, more are cautious in their outlook.

            “I would say, this round of bear market could be the longest ever for cobalt, as it takes time for the market to digest sharp increases in supply,” Yin of Shanghai Xiashang said.

            “The price of cobalt price won’t stabilise until it is too low for miners to keep processing,” he added.

            Until then, Yin said from his private museum full of ancient ceramics: “I will not buy one single ounce of cobalt […] and many Chinese cobalt players, especially those without other metal operations, will have to struggle along an extremely rough road.”

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