Asian Metal: Mr. Qian, thank you for accepting our interview. Would you please first give us a brief introduction of your company?

Mr. Qian: Founded in January 2008, Jiangsu Hengtong Jinggong Metal Materials Co., Ltd. is a wholly-owned subsidiary of Hengtong Optic-Electric Co., Ltd. and has registered capital of 330 million yuan (USD46.7 million). Located at Hengtong Photoelectric Cable Industrial Park in Wujiang, Suzhou, the company introduced a 150,000tpy copper rod continuous casting and rolling production line from Southwire, wire drawing machine from Niehoff GmbH as well as other advanced equipment. Its main products include bare copper stranded wire (wire section≤6mm2), round copper rod T1RΦ8.0, bare copper round wire Φ1.5-4.5 (TR/TY), and bare copper round wire TRΦ0.127-1.05 (multi-wire) for electrical purpose. Currently, copper rod accounts for about 40% of our total products and the remaining 60% is mainly deep-processing product. Copper rod production in 2019 reached 174,000t, with production value estimated at about 8 billion yuan (USD1.13 billion).

Asian Metal: In recent years, some Chinese copper rod companies chose to ramp up capacity, while some others opted to extend industrial chain for deep-processing. What is the long-term development plan for your company?

Mr. Qian: We are not planning to expand copper rod production capacity by adding new equipment in the near future but would upgrade the existing equipment. We would try to combine the pouring and rolling processes and develop an associated simulation system to see if we can raise capacity of our existing equipment to 220,000tpy. There is a potential for the ramp-up, and we have been in close touch with domestic colleges and research institutes on this subject.

For deep-processing, we added a new multi-head wire drawing machine this year and would purchase more equipment, but not too many, in the future. On one hand, large-scale and integrated downstream processing enterprises have advantages in terms of industry integration and cost, so it's not easy for us to grab more shares of this market. On the other hand, the profit margin of deep-processing products has dropped to RMB300-400/t (USD42.45-56.6/t) from previous levels of higher than RMB1,000/t (USD141.5/t). Hence expanding deep-processing capacity blindly makes little sense.

Asian Metal: More than 70% of China's copper rod production capacity is in the eastern region, especially in Jiangsu. Most copper rod companies see thin profits amid the increasingly fierce competition. How are you coping with this situation?

Mr. Qian: With this out-of-order increase in production capacity, many copper rod producers are just seeking higher production value instead of revenue, which leads to vicious competition. We don't think there are many solutions here. We can only address this issue by tapping into inner potential and actively reducing cost. For example, we can source copper cathode directly from smelters, not traders, which also means lower transportation and warehousing costs. We would try to maximize profits by this means or other similar approaches.

Asian Metal: There have long been problems relating to common payment terms such as D/A and spot pricing which have brought relatively high operational risks. How do you balance between customer relationship management and risk management?

Mr. Qian: Risk management should be involved in every link of the sales process. As the subsidiary of a listed company, we have stricter requirements in the pre-sales process based on our own credit rating system, and we only accept Documents against Acceptance (D/A) for clients meeting compliance requirements. In the middle of the sales process, we monitor our clients for their compliance with commitment, with every deal evaluated based on cash collection and commitment period. Therefore, we have a clear picture of clients' performance and can rank them based on their final credit score. The credit line will be reduced for low-ranking clients.

For spot pricing, we ask our clients to pay tentative price of the day when they take delivery of goods, and the tentative price would be slightly higher than market price. Besides, we have stricter requirements for clients granted with spot pricing payment method in terms of their performance, so as to minimize business risk.

Asian Metal: China's economy and the whole copper industry have been hit hard by COVID-19. How do you think this would affect copper industry?

In February, workers weren't able to return to work due to the outbreak and copper rod companies failed to resume production in a timely manner. But downstream orders didn't decline a lot and customers purchased more actively as copper prices were at low levels. From March to May, orders were basically in a saturated state. In the long run, the impact of the outbreak on China's copper rod industry is far-reaching. There is already severe overcapacity at home and TCs are rather low with thin profits, so a lot of copper rod producers are in an open position. But the COVID-19 brought more uncertainties to the market. The unilateral rise or fall of copper prices after the Spring Festival holiday was beyond most people's expectation, making it more difficult for copper rod producers to predict market movements.

Asian Metal: The recovery in domestic copper rod industry was better than expected in Q2 2020 when most producers maintained a high operating rate. What do you think are the reasons for that? Would this still be the case in Q3?

Mr. Qian: The brisk market in Q2 was partially due to unfinished orders concluded before the Spring Festival. Besides, copper rod producers kept rather low operating rate in February due to COVID-19 and downstream customers bought on dips when copper prices were low during February and March. In addition, new orders from State Grid and infrastructure projects since late March also contributed to the strong downstream demand.

But I think the situation would hardly continue since normally the market would gradually enter the slack season after June. We've learned that many downstream cable producers scrambled for orders recently, which indicated that the peak period for orders from power grid projects has passed. With the approaching of a quieter market in July and August, the copper rod market is expected to cool down.

Asian Metal: Domestic copper prices have been on the rise since late March and have basically recovered to the levels before the COVID-19 pandemic. What's your opinion on price movement in H2 2020?

Mr. Qian: Although we mentioned earlier that orders from wire and cable companies might decline, I don't think copper prices would drop in H2 2020 since there is no necessary connection between copper price and fundamental factor amid the current macro environment. Last year, copper market was primarily dominated by U.S.-China trade war, and the phase one trade deal reached between the two countries has reduced uncertainty about China-U.S. trade relationship. If not for the COVID-19 pandemic, copper prices should continue to go up. However, after the outbreak, countries around the globe have agreed on bailout packages which seem to work more effectively compared with those imposed during the financial crisis in 2008, with rapid transfer of funds from financial market to entities. Putting aside the possibility of a worsening U.S.-China relationship and the uncertainties about COVID-19 pandemic, we believe that there is a high probability copper prices would rise in H2 2020 and LME copper prices might even touch the level of USD7,000-8,000t.

Asian Metal: Thanks again for your time, and we wish Hengtong Jinggong a bright future!

Mr. Qian: Thank you.