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Chinese metals firms face cash crunch Industrial trend  5/25/2006 2006-05-24 10:44:00.0

Chinese metals firms face a cash squeeze as high prices for copper, zinc and aluminium are crimping profit margins and boosting financing costs, analysts and industry officials said Friday.

The cash crunch, hurting everyone from zinc smelters to air-conditioner makers, could force some operations to close and may add to the bad debt burden of Chinese banks.

"We give clients copper only when they pay cash," said an official for Jiangxi Copper Co. Ltd., China 's biggest copper producer.

The company owns the largest operating copper mine in the country but also imports the ore.

The price of copper, used in wiring and construction, has risen more than 80 percent this year and zinc, which is used to protect steel from rust, has climbed 70 percent. Aluminum, an important metal for the building and packaging sectors, has risen more than 25 percent so far in 2006.

World metal prices have been supported by continuing strong industrial demand from China, where consumption of copper has been forecast to rise 14.5 percent this year. But traders are wary of "demand destruction," where high prices dampens demand and can also lead to supply substitutions.

"For a purchase of 100 tons of copper, firms previously needed 2 million yuan, now they need 8 million yuan (US$997,500). This would increase their financing costs," Heng Kun, an analyst for Everbright Securities Ltd., said, adding those firms need more bank loans.

"If a firm is in the middle of the product line, it can only shift part of the rising costs to the downstream," Heng said, referring to miners as the upstream firms and product retailers as the downstream firms.

Copper traders say it 's getting harder to get cash out of customers.

"A client bought 200 tons of copper and paid us through five letters of credit one a week," said a trader, whose firm finances its copper imports mostly with bank loans and sells the metal to fabricating plants such as copper tube makers.

"Clients have fixed credit for each letter of credit. But banks are not willing to expand their limits," he said.

An official for Gree Electric Appliance Co. Ltd., China 's top air-conditioner seller, said the firm had not raised prices over the past year, although copper prices were higher. The firm is a copper tube user.

Aluminium fabricating plants are worried about payment defaults as high prices of the metal are pushing up costs for users.

"We have halved credits to clients. If they ask for large credits, we prefer not to take that order," a manager for one aluminium fabricating plant in Guangdong, said.

Chinese copper and zinc smelters are also struggling with the high price of ore to feed their plants.

"You think we are very happy now? We are worried as higher copper prices mean higher raw material prices," Jiangxi 's chairman He Changming told reporters in Hong Kong last month.

"Smelters ' demand for bank loans is rising," a zinc trader in Shanghai said. With banks ' credit staying tight, some zinc smelters are borrowing from individual investors who then receive the metal as payments, he added.

Many small metal merchants have stopped trade because of high financing costs, while other merchants are building bank loans.

Everbright 's Heng said high metals prices and tight credit could spur a consolidation in the industry as uncompetitive firms, including smelters and traders, close.

"Banks should be alerted and not give large loans to small- and medium-sized firms," he said.

Investors also see a risk to the country 's lenders even as metals prices slip from record peaks.

"If a lot of firms that have bank loans closed, banks would be affected," a manager for China Cinda Asset Management Corp., said. "When there is a closure, the closing firm 's bank loans would be restructured and could end up a bad debt to its banks."

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