MARKET & PRICE TREND OF TUNGSTEN CHINA, 2021

PART II of VII

Processing Cost of Tungsten Products in the Mainland of China

The first part of this paper analyzes the impact of macroeconomic environment related factors on the processing and production of tungsten products. This part further analyzes various cost factors that directly and deeply affect the production and operation links of tungsten product prices, and further analyzes the deep-seated causes of price fluctuations since June and the irreversible impact on the future.

The aforementioned macroeconomic and international political environment faced by China's tungsten products industry is complex, and coping with the macro operation and management environment with many uncertainties reflects the flexibility of an enterprise's mechanism and system and the ability of rapid management decision-making; It also reflects the enterprise's deep observation and insight into the tungsten products industry; At the same time, it is also the embodiment of the implementation ability and strain mechanism of production, operation and management regulation in all links of operation and management of tungsten products processing enterprises.

On June 27, the monthly report on industrial economic benefits in May released by the National Bureau of statistics showed that in the first five months, the profits of Industrial Enterprises above designated size increased by 83.4% year-on-year, 48.0% over the same period in 2019, and an average increase of 21.7% over the two years.

Zhu Hong, Senior Statistician of the industry department of the National Bureau of statistics, said that the efficiency of industrial enterprises continued to recover steadily in May, but the imbalance of enterprise profits was more prominent and the recovery foundation was not solid. First, affected by factors such as rising commodity prices, the new profits of industrial enterprises are mainly concentrated in the upstream mining and raw material manufacturing industries, and the cost pressure of downstream industries is increasing; Second, the profit growth rate of small and micro enterprises is lower than that of large and medium-sized enterprises, and the profit growth rate of private enterprises is lower than the average level of industries above designated size.

According to the annual statistical report of China Tungsten Industry Association in 2020, the absolute profit and profit margin of China's tungsten products industry are far lower than those of Industrial Enterprises above national scale, and a considerable proportion of enterprises are in a state of low profit or loss, which reflects the low technical content of China's Tungsten products industry, large proportion of primary products and poor market competitiveness, The low profitability also shows that the production and operation environment of China's tungsten products industry is poor, and it also proves that China's tungsten products industry has not transformed resource advantages into marketing advantages. At least, the production cost of tungsten products is increased, and the sales price is low, which makes the operating profit of tungsten products hover at a low level for a long time.

A rough overview of the cost situation of China's tungsten products industry, we believe that the current main production cost is at a high level for a long time, and the main components can be divided into fixed cost, variable cost, contingent risk and loss, mainly in the following aspects.

1. Mining Cost

Dr. Hanns, CEO of China Tungsten Online and CTIA, who has almost 30 years experiences of processing tungsten products, has previously analyzed and introduced the production cost of tungsten products. All the details of these articles may find at the link at:

“Expert comments on the recent sharp rise in the price of tungsten products”

① http://news.chinatungsten.com/cn/tungsten-product-news/98301-ti-13155.html

② http://news.chinatungsten.com/cn/tungsten-product-news/98368-ti-13170.html

③ http://news.chinatungsten.com/cn/tungsten-product-news/98516-ti-13212.html

④ http://news.chinatungsten.com/cn/tungsten-product-news/98601-ti-13221.html

⑤ http://news.chinatungsten.com/cn/tungsten-product-news/98653-ti-13225.html

⑥ http://news.chinatungsten.com/cn/tungsten-product-news/98690-ti-13430.html

⑦ http://news.chinatungsten.com/cn/tungsten-product-news/98790-ti-13300.html

⑧ http://news.chinatungsten.com/cn/tungsten-product-news/98852-ti-13330.html

⑨ http://news.chinatungsten.com/cn/tungsten-product-news/98866-ti-13335.html

⑩ http://news.chinatungsten.com/cn/tungsten-product-news/98909-ti-13350.html

(We’ll translate all these above-mentioned papers into English and list them at the web sites s of China Tungsten Online and CTIA GROUP at http://news.chinatungsten.com & www.51zzhui.com )

The production cost of tungsten concentrate mainly includes geological exploration investment, mine construction cost, direct production cost of mining (raw ore cost), beneficiation and other links, costs and expenses of safety, environmental protection and other links, as well as operation and management expenses, as well as relevant value-added tax (17%), resource compensation fee (2%), resource tax, land reclamation fee, environmental protection equipment investment Environmental protection operation cost and safety cost.

According to the previous professional research of tungsten products industry, the mining and selection of tungsten concentrate is mineralization, and the basic cost should be RMB 80,000-90,000 per ton. In addition to the rise of various costs in recent years, the current market price of tungsten concentrate is about RMB 100,000, which is also a small profit for mining enterprises.

Nearly 2 million tons of tungsten concentrate have been mined and processed in China's history of tungsten resource mining and processing for more than 100 years. In the early stage, most of the tungsten concentrate mining was to mine the rich and abandon the poor, overexploit for export exchange and short-term interests of enterprises and regions, and did not pay full attention to resource intensive utilization and ecological environment in the mining process, Lack of adequate protection for production safety and human resources. However, in recent years, the mining grade of tungsten concentrate is getting lower and lower, the mining conditions and technical difficulties are becoming greater and greater, the social and national requirements for the production, living environment and quality of industrial personnel are further improved, and the cost of tungsten concentrate and its back-end processing products will gradually increase.

As a strategic resource, tungsten resources have unique performance and expanding applications. Excluding the high prices in small emerging markets such as photovoltaic, photoelectric and new energy batteries, the cost of tungsten concentrate directly determines the main raw material cost of a series of traditional tungsten products at the back end, so it has index significance and decisive effect on the market price.

2. Tax Cost

The tax cost of production link is a legal rigid cost, which has a direct positive correlation with the production output and sales of the enterprise. It is an inevitable expenditure in the process of legal operation of the enterprise.

Before the tax authorities adopted big data and national networking, the tax on the raw and auxiliary materials of tungsten concentrate entering smelting production and processing through various channels may not be paid in full, and there may be some tax loopholes. However, in the era of big data, the electronic system of the tax authorities has accurate judgment on abnormal tax paying enterprises and commodities, which basically eliminates the problem of tax evasion in all links of tungsten products, The original tax payment of mineral products is decentralized and difficult to manage, and the tax cost is gradually balanced and fair, which is finally reflected in the commodity circulation and consumption of tungsten products.

3. Environmental Protection Cost

Taking CTIA special tungsten oxide supplier and a small tungsten product smelting and processing enterprise as an example, its direct smelting equipment investment is about RMB1.2 million, and the environmental protection cost invested to meet the environmental protection standards is about: environmental impact assessment of no less than RMB 500,000, investment in three waste treatment equipment of more than RMB 2 million, and subsequent equipment operation and maintenance costs, It can be seen that the depreciation of its environmental protection equipment has been twice that of its production equipment.

With the gradual tightening of China's environmental protection policies and the continuous strengthening of implementation, there is no dead corner for the environmental protection pressure of the tungsten products industry. In addition to water, electricity and noise pollution, the recycling and treatment of tungsten slag in the tungsten products industry, especially mining and primary product smelting enterprises, will be a major topic and an urgent problem to be solved, although tungsten slag is no longer listed as hazardous waste discharge, it is also a large cost if it is directly entrusted to a third party for treatment. The cost of solid waste treatment of some tungsten products with complex back-end treatment is about 10000 Yuan; Of course, if the waste tungsten slag can be recycled as the raw material of cement and machine-made brick, the treatment cost will be greatly reduced.

Although the implementation of environmental protection policies varies from place to place, the cost of environmental protection is bound to become an unavoidable problem and one of the increasing cost items in the tungsten products industry. We have reason to believe that the recent shortage of some tungsten products in the market or sellers' reluctance to sell is partly due to the restriction or shutdown of smelting enterprises due to the tightening of environmental protection policies and the non-compliance of emission and treatment methods, not the sharp increase and shortage of tungsten products consumption.

4. Safety Cost

The power, gas, steam and other pipelines and equipment used by general tungsten products smelting and processing enterprises, such as power transmission and transformation equipment, pressure pipelines and vessels, have certain potential safety hazards and risks. Therefore, regular maintenance, inspection, inspection and irregular random inspection are a large investment and cost for the enterprise, and it has high safety risks, uncertainties and contingent costs.

Fire hazard prevention, equipment and facilities investment and daily operation and maintenance require professional personnel and set up special posts for disposal, which also increases the safety operation and maintenance cost of the enterprise.

The safety requirements of acid-base and other corrosive liquids, gases and wastes involved in the tungsten products industry for labor safety guarantee have been gradually strengthened after the establishment of a special safety and emergency guarantee department in China, which will be another increasing non productive cost after the tightening of China's tungsten products processing field and environmental protection policies.

5. Replacement Cost

5.1 Depreciation Operation & Maintenance

We know that cash has the problem of cash discount, goods are stored and damaged, machinery, equipment, plants and roads need depreciation, and the depreciation of many items is not only the depreciation of actual value and purchase price. Even if we do not consider the possibility of accelerated depreciation and calculate the depreciation of existing assets as fixed costs, we have to consider the practical problem that the operation and maintenance costs are increasing with the rise of prices and other factors in the process of production and operation.

5.2 Replacement cost

The economic growth of an economy is mainly driven by consumption, whether it is industrial consumption or the consumption of consumer goods for people's livelihood, whether it is domestic consumption or international consumer goods export. The steady and slight rise of prices is an inevitable condition to promote consumption, which has been confirmed by the development process of almost all developed economies. In the decades after China's reform and opening up, prices fluctuated, but the market as a whole was constantly rising, which brought a problem to almost all medium and long-term investment fields and enterprises that the replacement cost increased, even the original depreciation could not cover the market price of equipment, and could not replace equipment and expand production, Some enterprises with poor profitability may face the risk of bankruptcy, let alone technology renewal and rapid iterative production.

From this perspective, if the tungsten products industry realizes a virtuous cycle and its own hematopoietic enhancement, it must consider adding additional capital accumulation and preparation for replacement cost in addition to financial depreciation for the long-term development of the enterprise and from the perspective of the future of updating equipment. If we observe from a higher perspective and think about the industrial structure of production and operation in the field of tungsten products in the environment of 5G + industrial Internet, we should accelerate technical depreciation and make preparations for replacement and even rebirth.

Therefore, from the perspective of accelerated depreciation and technical depreciation, the current cost of tungsten products is far from reflecting the actual cost of equipment depreciation, that is, it does not truly reflect the expected new_ on capital.

6. Financing Cost

The monetary policy committee of the people's Bank of China recently held a regular meeting in the second quarter of 2021. The meeting analyzed the economic and financial situation at home and abroad, and again stressed the need to implement monetary policy flexibly and accurately, promote the further reduction of real loan interest rates, deal with the relationship between economic recovery and risk prevention, and keep the economy running within a reasonable range. The attention to "overall situation" and "stability" in the regular meeting was significantly increased, and the expression was changed in three points compared with the first quarter:

(1) The expression of "strengthening in stability" and "improving in stability" in economic operation was increased, and the attention to "stability" was significantly raised to a higher level; (2) The expression of the economic environment has changed from "significant increase in positive factors of the domestic economy" in the first quarter to "the domestic and foreign environment is still complex and severe", and the expression of the domestic economy has become more pessimistic; (3) The expression of "maintaining the overall stability of the economy and enhancing the resilience of economic development" was added, and the concept of "overall situation" was mentioned for the first time.

From the changes of the above policies of the central bank, we can know that the current financing difficulties and high financing costs of enterprises are facts, so we will adjust policies, and require commercial banks to start from the overall situation and solve the problem of high financing costs of enterprises, especially the financing difficulties of small, medium and micro enterprises.

During the epidemic last year, we did get a small amount of bank financing at low interest rates, but it seems that such a policy has not been implemented since this year. I believe that many enterprises in the tungsten products industry, like us, are actually difficult to solve the capital problem at low cost, especially the capital problem required for long-term investment.

The financing difficulty and high financing cost of tungsten products industry have always been the main part of enterprise financial cost. We hope that in the future, the central bank's macro policy requirements can indeed tilt towards the real economy and small, medium and micro enterprises, solve some capital difficulties and reduce some financing costs.

Financing difficulties and high financing costs, especially small, medium-sized and micro enterprises with low-risk resistance, require a large proportion of fixed asset investment on the one hand, and are unable to adjust inventory according to market price fluctuations in order to control raw material costs on the other hand, which also increases operational risks for the production of small and medium-sized enterprises and weakens the self-regulation ability of cost fluctuations.

7. Human Resources & Labor Cost

Statistics show that in 2020, the average annual wage of Urban Non-private sector employees in China was RMB97,379 Yuan, an increase of RMB6,878 Yuan over the previous year, a nominal increase of 7.6%, and the growth rate was 2.2 percentage points lower than that in 2019. After deducting price factors, the annual average wage of Urban Non private sector employees in China will increase by 5.2% in real terms in 2020. Over the same period, the average annual wage of employees in urban private units nationwide was RMB57,727 Yuan, an increase of RMB4,123 Yuan over the previous year, a nominal increase of 7.7%, and the growth rate was 0.4 percentage points lower than that in 2019. After deducting price factors, the annual average wage of urban private sector employees in China will increase by 5.3% in real terms in 2020. It is worth noting that the average wage growth of urban private units in Sichuan, Shanxi and Hunan has reached double digits, 13.5%, 11.2% and 10.5% respectively. Sichuan and Hunan are the provinces with large output of tungsten products in China, which is an important factor affecting the human resource cost of China's tungsten products industry.

Due to the resource distribution of tungsten products in China, many mineral mining and smelting are mostly distributed in remote areas. Therefore, in the current job market, the use of medium and high-end technicians often has to pay high human resource costs. At the same time, due to the particularity of the metal smelting industry, some front-line Posts in production and processing do not need high diplomas, However, in order to attract and maintain the stability of human resources and production technology, many enterprises have to give larger salary increases and competitive wages.

In recent years, when the minimum wage base has been raised to varying degrees every year in all parts of China, the tungsten products industry has to face not only the rising wage, but also the rising labor insurance and welfare expenses such as five insurances and one fund paid with the minimum wage as the legal minimum base; At the same time, all localities have continuously strengthened the construction of trade union grass-roots organizations, and the payment of trade union funds has been gradually standardized and legalized. In turn, trade union funds have become one of the fixed management expenses based on human resources. Therefore, the cost of human resources is one of the rising costs of tungsten products in recent years.

8. Power Cost

Power is the main driving force of many tungsten products smelting enterprises, especially for domestic mainstream tungsten products enterprises such as back-end metal smelting and alloy sintering, power cost is one of the main cost items of enterprises. Taking a tungsten smelting enterprise with sufficient coal and electricity in Fujian as an example, due to difficulties in human resource scheduling and night security logistics, an enterprise did not take production measures of peak valley adjustment. Therefore, the gas price is about RMB0.80 Yuan per degree. As a large power consumer, the power cost of a large tungsten product smelting enterprise in the same city is also about RMB0.60 Yuan on average, The mainstream production process from tungsten concentrate to APT also accounts for a large proportion of power costs.

For a long time, China has tried to lower the residential electricity price, and the residential electricity price is significantly lower than the power supply cost. The difference is supplemented by industrial and commercial users in the form of cross subsidies. Compared with most countries in the world, China's industrial and commercial electricity price is high. The national development and Reform Commission recently revealed that "the next step is to improve the residential step price system, gradually alleviate the price cross subsidy, make the power price better reflect the power supply cost, restore the commodity attribute of power, and form a residential price mechanism that more fully reflects the power consumption cost, the relationship between supply and demand and the scarcity of resources."

In fact, in the whole power consumption, industrial power consumption accounts for nearly 70%, and residential power consumption accounts for only about 14%. Even if the reduction of industrial power cross subsidy will reduce the production and operation costs of high energy consuming enterprises such as tungsten products industry to a certain extent, it can not make up for this loss for power generation enterprises. At present, the cost of new energy in China is higher than that of traditional power generation enterprises, Therefore, if the costs of power generation enterprises are reflected according to the market mechanism and state subsidies are gradually reduced, the power costs such as electric power may not be significantly reduced for the tungsten products industry. With China's high emission industries such as petrochemical, chemical industry, building materials, iron and steel, nonferrous metals, papermaking and aviation gradually incorporated into the national carbon market during the 14th Five Year Plan period, The cost of tungsten products smelting and processing enterprises with high energy consumption may rise to some extent.

In the future, the implementation of carbon tax on carbon emissions, the increase of the proportion of new energy and the demand for electricity by new energy vehicles will become the resistance to the gradual reduction of power cost. Therefore, we can not expect the reduction of power cost in the short term, on the contrary, it may increase to varying degrees.

9. Transportation Cost

Since June, tungsten products in London, Europe have been in a low inventory state, and the price of tungsten products has increased by 2-3% this month. The main reason is that the vaccine application rate in Europe is generally high and the economy is in a slow recovery state. However, since the epidemic last year, the export volume of epidemic prevention materials and people's livelihood goods in China has increased sharply. Except that the land transportation between China and Europe is normal, the sea and air transportation capacity is very tight, the transportation cost has risen sharply and one container is hard to find. The freight price between China and Europe has almost quadrupled. Therefore, the deformity of the global supply chain, the imbalance between East and West logistics, and the abnormal blockage of the Suez Canal have cut off the main channels between China and Europe for a period of time, so that a large number of goods to be exported are piled up in the ports, A large number of empty containers in Europe and America cannot be transported back for normal circulation. In this case, the freight of tungsten products is rising all the way. At the same time, due to the large weight and high amount of tungsten products, there is no bargaining power in freight and premium, which leads to the high cost of terminal consumption of tungsten products.

The crowding out effect of tight shipping capacity makes a large number of goods in urgent need of new_s catch up with air transportation, and even many tungsten products have to take the "luxury journey" of express line for delivery. As a result, the freight included in the overall delivery cost of tungsten products has increased significantly, and the price in the overseas market has increased accordingly.

Moreover, tungsten products, especially tungsten oxide products and metal tungsten powder products, are generally regarded as dangerous goods and transported as dangerous goods, resulting in a much higher freight premium than ordinary goods. According to the experience of China Tungsten online, since 2020, the overall export freight has increased by more than 50%, and there is no sign of mitigation at present.

The same is true for domestic transportation. Due to the increase of fuel cost and the sharp increase of online shopping due to the epidemic, the domestic transportation capacity is also squeezed, resulting in a sharp increase in the transportation channels, railway express, road transportation and express delivery of various tungsten products.

Therefore, the transportation cost is one of the external costs beyond the control of both the buyer and the seller in the short term, and increases with the mitigation of the epidemic, the rise of oil prices and the recovery of the global economy.

Based on the above incomplete analysis of various production and operating costs of tungsten products, it is not difficult to find that the recent rise in the price of tungsten products is not accidental and will not fall sharply in the long run. Under the environment of US dollar drainage and inflation global output, the prices of raw and auxiliary materials, labor and power for the production and processing of tungsten products are rising, and the price of tungsten products has entered the rising channel; The duration, fluctuation and increase of the rise depend on the speed of global economic recovery and the game between supply and demand of tungsten products market.

END OF THE PART II OF VII OF THIS PAPER.

THE 3ND PART OF THIS PAPER WILL ANALYZE THE SPILLOVER EFFECT, OPPORTUNITIES & RISKS OF TUGNSTEN PRODUCTS IN THE FUTURE.

(to be continued)

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