Singapore 28/04/2016 - Zinc market participants do not rule out tighter supply in the coming months amid talk of maintenance-led smelter production cuts and in anticipation of tightening global ore supply and improved Chinese metal demand.
While there is no supply tightness in the Chinese refined zinc market for now, there is word in the market that at least five major Chinese smelters have carried out and/or plan maintenance in April-May, which could cut production by 30,000-40,000 tonnes over that period.
It is unusual for smelters to conduct maintenance work during April-May, which is the peak period for demand - factories typically carry out upgrade and repair work during the summer when demand is slower.
This has led several sources to suggest that the smelters are taking the opportunity to revamp facilities due to tight zinc concentrate supply.
Smelters have stockpiled zinc concentrates since last year but some would have run down their imports of raw material in the first quarter, a Shanghai-based trader suggested.
"If both miners and smelters still cannot meet eye-to-eye on TCs, it's likely that Chinese zinc concentrate imports will continue to fall," he said.
Low overseas treatment charges (TCs) have seen Chinese smelters choose not to take delivery of overseas concentrates and instead supplement their supply through the domestic market, which is much cheaper although the material is of poorer quality.
Spot TCs for zinc concentrate were assessed by FastMarkets at $125-135 per tonne CIF China last week, unchanged for the third consecutive month, in thin trading conditions.
While China's total zinc ore and concentrate imports rose 47.4 percent to 3.24 million tonnes last year, imports in the first quarter of this year fell 10.2 percent year-on-year to 649,261 tonnes. Since December, imports have been flat or weaker than year-ago levels.
Other than weaker Chinese demand, the decline in imported concentrates also reflects the closure of mines such as Lisheen in Ireland and Century in Australia alongside Glencore's 500,000-tonne production cuts in Australia, Peru and Kazakhstan, sources said.
Global zinc concentrate supply could fall to critically low levels later this year, triggering smelter output cuts in China and further tightening already limited global refined metal supplies, Scotiabank had forecast in March. This would set the stage for higher metal prices towards the end of the decade, it said.
But some remain unconvinced that Chinese smelters will cut refined zinc output by much this year despite a pledge among major producers to curtail production by a combined 500,000 tonnes this year, particularly with recovering zinc prices and still-profitable domestic TCs.
"We had cut production last year due to weak zinc prices. But prices have now recovered [so] it's not necessary to further cut production," an official with a major Chinese zinc smelter said.
Her company's refined zinc output this year is likely to be unchanged from last year’s total, she added.
The most active Shanghai Futures Exchange zinc contract price has rebounded by around 30 percent since November and the London Metal Exchange three-month price has jumped by about 35 percent since January.
Several large Chinese zinc smelters also told FastMarkets at the start of April that they have sufficient concentrates for at least a month or two, preferring to rely on domestic suppliers amid an unfavourable arbitrage window between the London and Shanghai and low overseas TCs.
Rising LME zinc prices and falling TCs have supported Chinese zinc mining in the past months but local TCs have recently started to fall in response to demand. Local sources pegged domestic TCs at 5,150-5,350 yuan ($792-823) for spot concentrate tonnages last week.
DEMAND SEEN IMPROVING
The decline in Chinese concentrate imports contrasted with China's refined zinc imports, which more than doubled year-on-year to 180,985 tonnes in the first quarter of this year.
Some industry watchers said it is too early to tell if the increase in Chinese refined zinc imports will continue. Most attributed the rise to earlier arbitrage opportunities that have disappeared since February rather than genuine end-user demand and tight supply in China.
Still, market participants agree that domestic demand is improving.
"There is enough zinc metal and no sign of demand outpacing supply in the domestic market for now," the Shanghai trader said. "But downstream users are starting to run down their inventory and are expected to start restocking soon."
Supply could fall behind demand in the second quarter, a Shanghai-based zinc analyst said.
"Operating rates among downstream users such as infrastructure and property construction have increased since the first quarter. This is good for zinc demand," she said.
Zinc inventories in major Chinese regions - Shanghai, Tianjin and Guangdong – have been falling since early-March, according to surveys by Shanghai Metals Market (SMM).
Stocks have fallen 64,600 tonnes or 14 percent since early-March to 388,600 tonnes on April 22, the Chinese metals research firm noted.
(Additional reporting by Vicky Chen and Ian Walker, editing by Mark Shaw)