China¡¯s lead, zinc sector to see consolidation

China¡¯s non-ferrous industry is all set for a metamorphosis soon with the government also favouring wiping out of all small companies in the filed.

As a result China will soon witness all its lead and zinc refineries coming together under one or two big companies.

China¡¯s government  also supports such an integration. Otherwise also the global mining industry will undergo mega deals of as much as $10 billion this year as the economic downturn presents once-in-a-lifetime acquisition opportunities.

China¡¯s recent boosting plan for the non-ferrous industry stresses to support restructuring and integration of domestic leading lead and zinc enterprises.

The country also expects to wash out small zinc and lead plants with annual production capacity of no more than 400,000 tons in three years.

The sliding prices of lead and zinc will also help kick out some small refining enterprises.

Despite shrinking profits for lead and zinc enterprises, some large groups like Zhuzhou Smelter Group Co., Shenzhen Zhongjin Lingnan Nonfemet Co., Henan Yuguang Gold & Lead Co still have plans to expand production. This reflects the fierce competition between these groups.

A slump in commodity demand and prices, coupled with a meltdown in global economic markets has driven down the share prices of many resource companies, making them cheap takeover targets.

In 2009, it is expected that niche deals will increase and a number of smaller $2 billion to $10 billion megadeals involving the mid-tiers.

The pace of consolidation would continue to be slower in the medium term due to financing challenges caused .

China-based companies and state-owned enterprises were actively shopping for once-in-a-lifetime acquisition opportunities, particularly in Australia and Canada.

China¡¯s state council has approved in principle a raft of policies, including investing in overseas resources, assets and companies, to encourage growth in its base metals sector, which includes metals other than iron, such as copper, aluminium, lead and zinc.

The two largest mining deals in 2008 were Chinalco¡¯s $14.3 billion purchase of a stake in Rio Tinto and Teck Cominco¡¯s $13.6 billion acquisition of a stake in Fording Canadian Coal Trust.

This was surpassed recently by Chinalco¡¯s proposed $19.5 billion investment in Rio Tinto to acquire stakes in a suite of assets and lift its shareholding in the company.

A sharp reduction in commodity inventories and a bias in global stimulus packages towards metal-intensive infrastructure spending may create a new imbalance towards a shortage of supply and push up prices.

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