The benchmark nickel price staged an epic market corner at London Metal Exchange (LME) in March 2022, forcing China Metals Group Tsingshan（青山控股） to the brink. What kind of company is Tsingshan? How did Tsingshan go through a few ups and downs on its journey to go overseas, and why was it caught in the storm of public opinion over the nickel mine?
Headquartered in Wenzhou, Zhejiang Province, Tsingshan Holdings started out in the stainless steel industry in 1988. Tsingshan Holding Group was established in 2003. Since 2019, Tsingshan Holdings has been listed on the Fortune 500 list of the world's largest companies, rising in the rankings year after year. However, the company has been very low-profile with little publicity and is known as the "invisible champion" of the industry.
On 12 January, Tsingshan Holdings disclosed that the group's sales revenue would be CNY 368 billion by 2022, making it the largest stainless steel producer in China, with its two main businesses being stainless steel and new energy. It has eight production bases, including Qingtuo (Fujian), Yangjiang (Guangdong) and Qingtian (Zhejiang), as well as overseas production bases in Morowari Industrial Park (IMIP) (Indonesia), Weidabai Industrial Park (IWIP) (Indonesia), A&T Stainless. LLC (Pittsburgh, USA), Gujarat Industrial Park (Gujarat, India) and Central Africa Smelting Production Base (Zimbabwe).
Tsingshan Holdings has a production capacity of 300,000 tonnes of ferronickel. According to preliminary data released by the US Geological Survey in 2022, global nickel production from mines reached 2.7 million tonnes in 2021, which means that Tsingshan Holdings already accounted for approximately 22% of global nickel production in that year.
Born from the manufacture of automotive doors and windows (1988-2003)
In 1988, Xiang Guangda and Zhang Jimin, the two key figures of Tsingshan, founded the Zhejiang Ouhai Automotive Door and Window Manufacturing Company. In 1992, they founded a new company, Zhejiang Fengye Group, one of the first private stainless steel manufacturers in China. In May 1998, Zhejiang Tsingshan Special Steel Company, the first company in the Tsingshan family was established and became one of the largest private stainless steel producers in China at the time. In 2003, Tsingshan Holdings was established.
RKEF technology breakthrough makes the "No.1" stainless steel producer in China (2004-2008)
In 2008, Shanghai Dingxin Investment Co Ltd, controlled by Xiang Guangda, was the first in China to adopt the latest RKEF technology, which was closely integrated with the stainless steel production process. The media exclaimed: "This is an innovation in the world of stainless steel production. It can save more than 20% in steelmaking costs and more than 50% in energy consumption per tonne of steel." As a result, Tsingshan Holdings has secured its position as the NO.1 stainless steel company in China.
Globalization of the layout and crowned as World King of Nickel (2009-2021)
In 2009, Tsingshan invested in Indonesia to develop laterite nickel mines in the country. In February 2012, Tsingshan Holdings invested in a ferrochrome smelting project in Zimbabwe.
Since June 2013, Tsingshan Holdings' globalization has accelerated: in May 2015, its Sulawesi Mining Investment Company opened a nickel smelter; in 2016, construction of the first ferrochrome plant in Indonesia began; in June 2017, Tsingshan Holdings signed a cooperation agreement with Ehrman for the Weidabe project; In August 2018, the project of Witabai Industrial Park in Indonesia was launched; in January 2019, the project of producing new energy wet material from laterite nickel ore started construction in Morowali Industrial Park in Indonesia; in 2020, the first project of Witabai Industrial Park in Indonesia was put into production; in 2021, the new energy project of Shanghai Lanjun was put into production. Tsingshan Holdings rose to 279th place in the Fortune Global 500 and is known as the World King of Nickel.
With risks and gains, Tsingshan Holdings is determined to go overseas
A decade ago, Tsingshan Holdings was not even in the top five of Chinese stainless steel companies. One of the most important moves it made to distance itself from other stainless steel companies in China was to set up a smelting chain in Indonesia in 2009. Although Chinese steel companies are the global leaders, their profit margin is only 4%, while the iron ore industry, upstream of the steel industry, has a profit margin of over 36%. If smelting and processing enterprises can master the raw materials, they can eat back a large part of the profits earned by upstream miners.
But the greater the gain, the greater the risk. Staying in the country to do smelting and processing, although the profit is thin, but the income is stable. If you go to buy a mine or go to build a plant near the source of the mine, the capital investment can easily be hundreds of millions of dollars, and if you do not operate properly, overspending occurs, dragging down the main business and losing what could be your entire fortune. And if the mineral raw materials required by the industry are still overseas, the risk index increases exponentially, taking into account political risks and differences in national conditions. Therefore, before Indonesia banned the export of nickel ore, almost no domestic companies dared to go overseas. Tsingshan Holdings was the first Chinese company to take the initiative to build a smelter in Indonesia before the ban on nickel ore was introduced in 2009.
Technology underpinning and strict cost control
Indonesia has the richest nickel laterite reserves in the world, accounting for about a quarter of the world's reserves. The nickel used to produce stainless steel in China mainly comes from laterite nickel mines in Indonesia. Laterite nickel ore can be an important raw material for current stainless steel production, mainly thanks to the RKEF pyrometallurgical smelting technology. Tsingshan was the first domestic smelter to build a RKEF ferronickel production line and is a national leader in RKEF technology.
In addition, Indonesia is also rich in coking coal and is a major source of coking coal imports for China. The amount of coking coal used in the blast furnaces for ferronickel smelting and the electricity consumption are both high. As the main raw material for power generation in power plants, cheap coking coal greatly reduces the cost of power generation, which further compresses the cost of nickel smelters. Tsingshan has built an integrated industrial chain in Indonesia from raw materials to intermediate products to stainless steel. With freight costs, electricity consumption, smelting costs, and easy access to cheap nickel ore raw materials locally, the cost savings at each step add up to an overall 20%-30% lower smelting cost than at home.
Overseas construction and localized operations
The first step in building a plant overseas is to have land. The land lease and purchase policy varies from country to country, for example, Indonesia has a private land ownership system and requires the purchase of land from local farmers. There is no fair price for land, and if farmers know that a large company is coming to buy land, they can ask for $200,000 for land that was originally $3,000 the next day. So the strategy adopted by Tsingshan Holdings was to negotiate with the larger local landowners: if they sold 2 hectares of land, $5,000 per hectare; if they could sell 10 hectares, $6,000 per hectare. In this way, the landowner would take the initiative to go to the farmer to buy the land and sell it to Tsingshan Holdings, rather than having to bargain with the retailer himself. This strategy is effective in stabilizing the supply of land without the risk of a shortage of land due to high prices, and in controlling land costs and negotiation costs without the risk of delaying or failing to build a factory due to unsuccessful negotiations.
At Indonesia, Tsingshan Holdings has made it a requirement that all documents and regulations for the plant are bilingual. Respecting local beliefs and religious customs, the plant is scheduled to take into account the time of worship for Indonesian employees. The canteen where Indonesian staff eat must be cleaned and disposed of overnight before Indonesian food can be cooked if pork has been cooked previously. There are also several mosques on the site and all ceremonies must include an Islamic prostration. This "follow the local customs" approach has effectively enhanced the company's social acceptance and image in the region. By respecting the local culture, religion and customs, Tsingshan is better integrated into the local community, building a good corporate image and reputation, enhancing the sense of belonging and identity of local employees, and increasing their motivation and productivity. It also avoids and reduces conflicts and disputes, and improves the level of cooperation and coordination between Aoyama and the local government and community.
The global layout of the whole industry chain to establish an absolute advantage
Upstream of Tsingshan's business focus on ferronickel resources and the layout of laterite nickel ore in Indonesia. Tsingshan Holdings' domestic ferronickel business is mainly laid out through the Fujian Qingtuo Group, which has developed an annual production capacity of 1.8 million tonnes of nickel alloys. The foreign business is realized through Indonesia's Castle Peak Park (IMIP) and Weidabai Industrial Park (IWIP), with a total capacity of over 3.5 million tonnes per year. According to CITIC Capital, Castle Peak Holdings has a global nickel market share of 18% in 2020.
The downstream traditional business focuses on stainless steel production. 10.8 million tonnes of crude steel will be produced by Tsingshan Holdings in 2020, with a capacity of over 10 million tonnes. Tsingshan currently has three production bases in Zhejiang, Fujian and Guangdong, mainly producing stainless steel crude steel, hot rolling and cold rolling. The overseas stainless steel layout is mainly in Indonesia's Tsingshan Park, which has basically achieved integrated stainless steel production.
Focus on the development of new energy. Tsingshan Holdings started to lay out the new energy field in 2017, relying on its upstream advantages and seeks to build a whole industry chain from both upstream nickel mining and downstream new energy products manufacturing. At present, Tsingshan has joined hands with Huayou Cobalt(华友钴业)and GEM（格林美） to develop laterite nickel mines in Indonesia for the construction of a nickel resource manufacturing system for new energy batteries, and with XCMG（徐工集团）to enter the new energy automobile industry. In addition, the company has also signed a high ice nickel supply agreement with Huayou Cobalt（华友钴业）and CNGR（中伟股份）, under which Tsingshan Industry will supply 60,000 tonnes of high ice nickel to Huayou Cobalt and 40,000 tonnes of high ice nickel to CNGR within one year from October 2021.
LME nickel mayhem: What revelation can draw from it
On March 7-8, 2022, the price of nickel was in flying mode, soaring nearly 250% in two days, breaking several integer barriers such as 50,000, 60,000 and 70,000, and surpassing the USD 100,000/ton mark in one fell swoop to set a new record high. The metal's previous all-time high was USD 51,800 in 2007.
The London Metal Exchange (LME), the world's largest metal exchange, issued two announcements in a row on March 8 local time, first announcing the suspension of nickel trading, canceling all nickel trades executed on the OTC and LME select screen trading systems at or after 00:00 a.m. UK time on March 8, and postponing delivery of all spot nickel contracts scheduled for delivery on March 9.
The LME issued another announcement during the U.S. midday session A further announcement said that due to uncertainty in the wider market, nickel trading is not expected to restart before March 11, and a 10% stopping mechanism is to be set when trading resumes.
The LME said it has been closely monitoring the impact of the situation in Ukraine on its trading market, noting the recent low inventory and price volatility of its trading metal varieties, especially nickel. the LME said it will actively plan for the reopening of the nickel market as a next step and will announce the mechanism to the public as soon as possible.
On the evening of 9 March, Tsingshan Holdings announced that it had replaced domestic nickel metal sheets with its high ice nickel and had deployed sufficient spots for delivery through various channels. On 15 March, Tsingshan announced that it had reached a silent agreement with a syndicate of futures bank creditors, agreeing not to close out positions or request margin increases on existing positions. On 16 March, nickel prices fell continuously as LME nickel trading resumed. By the close of business on 22 March, the LME nickel price had fallen to approximately USD 28,000 per tonne. The LME nickel short squeeze was temporarily relieved. It has been more than a year since the nickel plate incident, and there is no way to tell whether Tsingshan Holdings has succeeded or failed in this long-short gamble, and it is difficult to judge how big and far-reaching the impact of the demon nickel incident has brought to Tsingshan Holdings; more games may have been hidden in the smoke after this storm.
In terms of the history of commodity derivatives trading, several Chinese companies or institutions have fallen foul of the overseas futures market, including Zhuye's zinc futures trading (1997), AVIC's crude oil derivatives trading (2004) and the State Reserve's copper futures trading (2005), all of which resulted in huge losses due to speculative shorting and even eventually led to the liquidation of the companies. Companies using traditional hedging tools to hedge their risks may be subject to forced positions and run-ins. The takeaway from this incident is that companies should strengthen their risk awareness, adhere to hedging and improve their risk control systems; formulate reasonable trading strategies and strictly manage basis risk; and manage liquidity well to prevent delivery risk and ensure liquidity.
In the process of going global for more than 20 years, Chinese companies have already globalized their industrial layout perspective. China's stainless steel industry has achieved structural optimization, and China's power battery industry has secured raw materials. Although Chinese mining companies have demonstrated excellent operational capabilities, they still need to learn and be cautious in the use of financial instruments in their practices.