London 17/06/2016 - Zinc and lead concentrate treatment charges (TCs) fell in May and into June as supply tightened but spot trades were scant, with Chinese smelters baulking at much lower terms for concentrates.
Zinc TCs, the discounts on refined prices miners grant to smelters to cover the cost of turning concentrate into metal, were quoted at $110-120 per tonne on a cost, insurance and freight (CIF) basis for delivery to Chinese ports. This is their lowest since FastMarkets started pricing in September 2014 and down from $125-135 in April.
"It's impossible for us - and most Chinese smelters - to do business when the TC is lower than $140," a local smelter told FastMarkets.
"[There are] no imports from our side - we only buy domestically as it is around 1,000 yuan per tonne cheaper than imports," a second smelter in China said, adding that a weakening yuan is a major concern.
Most Chinese smelters surveyed by FastMarkets have turned their back on overseas zinc concentrate tonnages due to the negative arbitrage between the London and Shanghai market. But most are still operating close to full capacity in a better price environment, downplaying the announcement of production cuts of 500,000 tonnes made last year.
"There's no reason for smelters to cut their productions as the current domestic TCs are still doable and the zinc price is not bad at all," a third smelter said.
Chinese smelters must rely heavily on inventories, domestic mine supply and port stocks to meet their needs. Average stocks at most domestic smelters are widely reported to be around one month, down from 30-40 days to two months in April.
"In terms of domestic supply of zinc concs, it's hard to say an exact number but overall the market is becoming tighter and the lower domestic TC is a reflection [of that]," the second Chinese smelter said.
Average domestic TCs for smelters were recently around 5,000-5,200 yuan ($759-789) per tonne on a delivered basis including VAT, down 100 yuan from the previous range, according to SMM data.
While smelters would prefer to import at $140-160 at least, miners and traders have resisted - they believe TCs should continue to fall due to zinc's strong fundamental story and lower stocks at major ports in China.
But this is the reality faced by zinc smelters in Japan, South Korea and in Europe, with terms falling heavily for zinc concentrates that are able to replace Australian production - Glencore's Mt Isa, MMG's Century - that has been lost this year.
"There's a real need for people to cover positions from Glencore or Trafigura feeding Nyrstar. And there's not much concentrate… there is a very strong tightness at the moment," a producer said.
Several sources claimed that traders have contacted other merchants to buy specific zinc concentrate grades and cover trading book positions.
"It's a war between traders/miners and Chinese smelters as we don't import and they hold too much stock but demand is in China… We will see who will compromise first on TCs," a fourth smelter in China said.
HIGH-SILVER LEAD TCS DROP ON TIGHTER SUPPLY
The market for high-silver lead concentrates remains supported by production cuts by Glencore and by Korea Zinc's decision to lift lead smelting capacity.
TCs for high-silver concentrate dropped $10 over the past month to $145-155 per tonne while low-silver lead concentrate also edged lower to $150-160 per tonne.
"What is important in the market is the Korea Zinc expansion - it's taking a lot more from a concentrate perspective. I haven't seen a dramatic change but there is less concentrates in the market," a producer said.
As part of expanded silver output, Korea Zinc has lifted lead smelting capacity by 100,000 tonnes per year to 430,000 tonnes per year, which will require roughly 210,000-260,000 additional tonnes of high-silver lead concentrates.
On the supply side, some Chinese mines have started to resume production but progress is slow while SHFE lead prices are close to January lows. Lower LME lead prices is favouring imports for some Chinese smelters.
(Additional reporting by Archie Hunter and Vicky Chen, editing by Mark Shaw)