Hong Kong 16/06/2016 - Chinese zinc smelters have shunned imported concentrates in the spot market this year due to the closed arbitrage between the London Metal Exchange and Shanghai Futures Exchange for most of this year, while choosing to rely on domestic concentrate supply.
But Chinese refined zinc production is unlikely to drop by much this year due to favourable domestic treatment charges (TCs) for zinc concentrates, market participants said on the sidelines of LME Week Asia in Hong Kong.
"Last year we see many major zinc smelters relying on more than 50 percent on imports [for their concentrate requirements] but the situation is going to change this year," said a zinc smelter source.
TCs for Chinese smelters in Southern China were recently around 5,100-5,300 ($775-805) yuan per tonne while those in the northern region enjoyed even higher TCs at 5,200-5,400 ($790-820) on a delivered basis including VAT due to lower transport costs.
“Domestic supply have been catching up with increased smelting needs as SHFE zinc prices have recovered and some small/medium-sized mines have resumed production,” he said.
Offers from overseas traders or miners were last around $110-130 per tonne on CIF China basis with thin liquidities.
“I think traders/miners have overestimated Chinese smelters' reliance on overseas materials. They push the spot premiums way below the annual numbers, which does not make sense for us to import if the loss is around 1,000 yuan per tonne,” he added. “I will only buy if it’s above $160 should the import arb remain closed.”
Mines in Northern China are relatively small and cash-rich and had stocked up their production even during the low-price environment last year.
“They have to, as the mining companies have a limited time for ownership of their mines, say around 10-15 years. If they don’t dig it out when they can, they will relinquish their rights,” another industry source said.
Sources also stressed that those mines which were forced to shut down due to environmental issues would be able to open again as local governments would need to balance between the pros and cons between economic benefits, umemployment and environmental concerns.
Meanwhile, zinc smelters would not consider output cuts as they announced last year unless the domestic TCs drop below 4,500-5,000 ($684-760) yuan per tonne, sources said.
“I am quite surprised that there is a good availability of domestic supply, and we are buying for a decent amount for May at 5,000-5,400 per tonne,” another industry participant said.
Smelters would only seriously consider output cuts if the combination of zinc prices and TCs all move downside as a de-escalator included in contracts' price formula would amplify the drop of TCs which would mean less margins for smelters.
Zinc smelters in China have been buying zinc concentrates and building up inventory once they receive cash after selling their products as the tightness in concentrate supply become more evident.
Working concentrate stocks in major zinc smelters are around 30-50 days, while operating rates for big-sized smelters are currently nearly at full capacity - the average capacity utilisation rate in the industry is around 75-80 percent.
China's zinc ore and concentrate imports had started falling since late last year. In April, it dropped 36.8 percent year-on-year to 147,138 tonnes, taking year-to-date imports to 796,400 tonnes. This was down 16.7 percent from the same period last year.
(Editing by Vivian Teo)