In China’s Industrial Heartland, Xi’s Revamp Plan Comes at a Cost

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(Bloomberg) — The pen squeaks as Jeff Pan draws a chart on a whiteboard. He draws a black line indicating rapidly rising consumption, then a blue line that rises erratically, before finally crossing the first line.

This, he explains, is the offer.

Pan, who runs a medium-sized copper processing plant in the heart of China’s manufacturing, offers a lesson he and others in the high-tech supply chains that President Xi Jinping is supporting at their own expense — demand isn’t everything.

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“The competition has been very fierce in the past two years,” Pan said at his factory near the manufacturing hub of Yiwu, a few hours’ drive south of Shanghai. “Many companies will rush into a growing industry. At some point, there is a big candidate and only the strong can survive.”

In 2017, when Pan founded Zhejiang Huanergy Co., he aimed to capitalize on what he predicted would be a huge demand for ultra-thin copper foil used in electric-vehicle batteries and electronic circuits. He was right, and consumption has ballooned. Huanergy, as it is known, supplies products to Chinese giants such as BYD Co. and Contemporary Amperex Technology Co. Ltd.

The problem was that many other companies had the same idea, a dynamic that affected other sectors that the government chose to help reshape the economy and dominate the industries of tomorrow.

The impasse is evident across green energy manufacturing, a key sector in Xi’s efforts to outmaneuver geopolitical rivals. An oversupply crisis has overwhelmed solar panel makers, pushing companies into deep losses and forcing them into brutal demolition. In batteries, China’s capacity is now large enough to meet the entire global demand and more.

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The surplus has left companies like Huanergy struggling to capitalize on Beijing’s attention—while avoiding falling victim to Xi’s “new productive forces” initiative. In the old Marxist concept of “productive forces,” the campaign in practice involves using state power to accelerate everything from nuclear technology to electric vehicle production, with the goal of helping to ignite technological advances, productivity gains and ultimately economic growth. That campaign is likely to come up again at next week’s policy meeting in Beijing.

In theory, copper should be among the beneficiaries. “Green” demand for the metal is expected to grow by more than 10% this year and next in China, according to Goldman Sachs Group Inc. — and almost no expansion elsewhere.

But Huanergy’s experience shows that the consequences of economic imbalance are far-reaching, even for those at or near the edge of progress.

The copper foil rolled in the Pan factory is not unlike the familiar aluminum found in kitchens everywhere, but it is much more refined and used in more technical fields. In lithium-ion batteries, the ultra-thin copper strips, which are highly conductive and heat-resistant, form a vital part of the anode. The same sheets are found in consumer electronics and computing—nearly everywhere that requires seamless connections between components.

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Annual demand for copper is expected to grow by more than 50% by 2040, according to BloombergNEF estimates, a figure that focuses mostly on wires and cables in vastly expanded power grids.

According to consultancy CRU Group, demand for flat rolled copper, including sheet, strip and foil, will rise by about a fifth from 2023 levels by 2028, driven in part by growth in demand from foil.

“It’s a relatively small market, but it’s very fast-growing,” Pan said.

Pan, a former China Daily journalist who is married to the daughter of Shao Chenxiang, founder of parent Huayuan Group, spotted an opportunity shortly after returning to China from the United States, where he studied for an MBA.

Huayuan, one of the world’s largest suppliers of vitamin D as well as textiles and building materials, also has a copper plant. Pan has suggested the company eschew traditional copper products in favor of making chips needed by tech companies.

“We had to believe that electronics, all digital devices and applications, and batteries would become very important,” he said. “All of these predictions have come true, but at the time it was a leap of faith.”

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No one would argue that Pan won the technological part of his bet. Massive computing power is needed to support AI, and that in turn requires metals, even if China’s copper sector is currently suffering from overcapacity and a shortage of raw materials.

But the outlook for copper’s traditional applications is more uncertain. Processing fees have fallen by a few hundred yuan each year due to “insufficient demand and rapid expansion of domestic capacity,” said Hai Jianxun, a sales executive at Henan Yuxing Copper Co., a smaller company in central China that makes copper pipes for use in things like air conditioners, by phone. That means “no meaningful profit” for now.

But what Pan didn’t expect was an increase in the number of other companies following the same path.

However, what has led to excess capacity at the industrial level may also lead to the development of China’s technological advantage.

The only way out of this impasse, Pan thinks as the plant quietly hums in the background, is to move up the value chain, cut costs and try to make better products. For copper foil, that means thinner, cleaner sheets that are smoother on a molecular level.

He added that there had to be a way to separate the companies that would survive from the rest. “I think that’s the natural way of the capitalist system,” he said.

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