Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 2008 Chinese manganese ore and alloy market annual report Preface 2008 world economy went deeper and deeper in “the US subprime mortgage crisis”, which gradually becomes a global financial storm and even economy recession. Chinese economy also experienced violent ups and downs, and steel and relative industries were seriously damaged. In the first half of the year, steel market kept going up pushed by roaring prices of raw materials and continuous strong demand. Ferroalloy market climbed up constantly and prices of silicomanganese and ferromanganese hit record high again and again. However, in the second half, as a result of the ongoing international financial crisis, real economy was hit both at home and abroad, among which, steel industry stood in the gap. Steel prices slumped while steel production was cut down greatly subsequently. The upstream ferroalloy industry followed suit closely. Stimulated by the economy-saving policies government established, at the end of 2008 part of the steel market warmed up slightly, with some steel makers resuming production, but where the whole market is going remains to be seen for 2009. 1. Industry background 1.1 World and China crude steel production Manganese ore products include metallurgical manganese ore, manganese carbonate powder, manganese dioxide powder used in chemicals and batteries. Manganese is mainly used as deoxidizer, additives as well as good desulfurizer in steel smelting in the form of ferroalloys. Therefore, more than 95% of manganese products are used in steelmaking, while half of the rest part was used as non-ferrous metal alloys and half in the battery, chemical industries, etc. In China, 65% of manganese ore is used to produce alloys, 30% to produce electrolytic manganese metal, and the rest for chemical industries. Manganese alloys include silicomanganese, high, medium and low carbon ferromanganese. All the manganese alloys are used as deoxidizers and additive of alloying elements in steel production process, playing an important role in improving the quality and performance of steel products, so there is a saying “no steel without manganese”. Averagely, per ton of crude steel consumes 10 kg of manganese, and therefore, manganese alloy industry development is closely related to the steel industry. According to preliminary statistics released on 22nd Jan, 2009 by World Steel Association, Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 1 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 World crude steel output is 1.3297billion tons, down by 1.2% from 1.3454 in 2007, which is a decline for the first time ever since 1998. Looking at steel production by region, the crude steel output is 198.6 million tons for 27 counties of EU in 2008, down by 5.3% yoy; 114.1 million tons for CIS, down by 8.1% yoy; 125.4 million tons for North America, down by 5.5% yoy; 4.76 million tons for South America, down by 1.4% yoy; 1.88 million tons for Africa, down by 7.4% yoy; 1.66 million tons for Meddle East, up by 1.2% yoy and 770.5 million tons for Asia, up by 1.9% yoy. The statistics also indicates that crude steel output is 502 million tons in China in 2008, with a yoy increase of 2.6%, accounting for 37.8% of world total output, up by1.4 from 2007 and China stays the largest producer of crude steel. The second one is Japan, of which 2008 crude steel output is 118.7 million tons, down by 1.2% yoy. The third to the tenth largest producers are US, Russia, India, South Korea, German, Ukraine, Brazil and Italy. Meanwhile, according to the statistics released by China Steel Association, China produced 500.488 million tons of crude steel in 200, up by 1.13% yoy; 470.6741 million tons of pig iron, down by 0.7449 million tons from the previous year with a yoy decrease of 0.16%. China Steel Association pointed out that Chinese steel capacity was in oversupply. Till the end of 2008, superfluous steel smelting capacity reached about 0.16 billion tons. China Crude Steel Production by Year 100,000 Tons 600 35.00% 30.00% 500 25.00% 400 20.00% 300 15.00% 200 10.00% 100 5.00% 0 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 Crude Steel Output Grow th Rate y-o-y Influenced by the financial crisis, Chinese crude steel reached 0.50 billion tons in 2008, only slightly higher than 0.49 billion tons in 2007and much lower beyond the expectation industry insiders made at the beginning of 2008. At that time, 2008 crude steel output was expected to reach 0.52-0.54 billion tons. The yoy increase declined to as low as 1.1%, Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 2 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 strongly contrasting to 15.7% in 2007 and ending the double-digit growth for 7 years. The statistics from China Steel Association also shows that Chinese steel production was 0.58 billion tons, with a mere increase of 3.6% yoy. China Steel Association predicts the pig iron output will decline to 0.46 billion tons, crude steel to 0.48 billion tons and steel products to 0.50 billion ton in 2009, while global crude steel production is expected to decrease by 10% this year. Steel industry is one of the most badly hit industries. From the beginning of 2008 to June, crude steel and steel products outputs were growing fast and stably, with an increase of 10% or higher on a month-on-month basis. However, monthly growth rate plunged since July and became negative in September, while crude steel production declined 17% MoM and steel products down 12.4% MoM in October, marking a historic drop. 2008 China Crude Steel and Steel Products Output Growth m-o-m % 20 15 10 5 0 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -5 -10 -15 -20 Crude Steel Steel Products Source: National Bureau of Statistics of China This is partly resulted from the shrinking demand and partly from inventory adjusting by steel suppliers. The global financial crisis began to affect entity economy in the second half of 2008; orders from constructions, autos and household electrical appliances quickly diminished; steel prices slumped; global leading steelmakers such as ArcelorMittal and Severstal cut down production greatly and steel output was reduced on a large scale across the world. Major steel mills in China like Baosteel and Shougang followed the suit, with most small-sized steelmakers shut down. Financial statistics from 71 steelmakers covered by Chins Steel Association shows that industry-wide monthly loss took place in November, with a total volume of 12.77 billion tons. Thereafter, government issued a few economic-stimulating policies. Besides, inventory began to diminish in steel mills. Steel Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 3 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 demand warmed up slightly and prices rebounded at the end of 2008. Bulk ferroalloys market followed the step of steel market closely in 2008, just like riding a roller coaster. 1.2 Policy background 1.2.1Export duty rises to 20% for silicomanganese and ferromanganese To control the development of high-energy consuming and high-polluting industries, the government decided to raise the export duty from 10% in 2007 to 20% since jan1st, 2008 for silicomanganese and ferromanganese. Actually, export control measures of ferroalloys have been carried out ever since 2005. The 8% export rebate was canceled from 2005; 5% export duty was laid in 2006 and was raised to 10% in 2007. 1.2.2 Ministry of Commerce to carry out ferroalloy export license system In order to further regulate ferroalloy export, Ministry of Commerce decided to carry out ferroalloy export license system in August , and 164 firms including both producers and traders have been approved qualified for A grade ferroalloys (including silicomanganese and ferromanganese) export in the coming 2009 till the end of 2008. Some of the key conditions are: one producer must have be approved qualified for “ferroalloy industry entry conditions” by NDRC and its total export volume of ferromanganese, silicomanganese and ferrosilicon reached 3,000t in 2007/2008; one trader must make purchase from these producers qualified for ”ferroalloy industry entry conditions”; its total export volume of ferromanganese, silicomanganese and ferrosilicon reached 3,000t in 2007/2008 and its registered capital should reach RMB50,000,000. Industry insiders believe that the newly-set regulation will further limit ferroalloy export and large-sized firms will benefit. 1.2.3 VAT reform Approved by State Department in August, 2008, VAT reform will come into effect from 2009. The VAT rate of both local manganese ore and imported materials will be raised from 13% to 17%, while it seems to have few inferences on manganese ore and alloy industry so far. Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 4 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 1.2.4 EU delays anti-dumpling tax In august, 2008, EU delayed the anti-dumpling tax again for silicomanganese of Chinese and Kazakhstani origins to September 6, 2009. In December, 2007, EU set the anti-dumpling tax rate at 8.2% for Chinese materials and 6.5% for Kazakhstani materials but delayed it by 9 months thereafter.