London 22/09/2016 - Treatment charges (TCs) for zinc and lead concentrate have dropped below $100 per tonne for the first time in several years, as some smelters finally accepted lower terms for spot purchases in light of tightening supply.
There is limited spot availability for zinc and lead concentrates in light of mine production cuts late last year, meanwhile on the demand side primary smelters have not yet made production cuts.
"The important thing is that smelter have now committed [below $100 per tonne TCs] so actual business is being done there," a trading source in Asia said.
Nevertheless there are still some smelters resisting lower levels and are sticking to the higher end of the market.
ZINC TCS BREAK BELOW $100/T IN SALES TO SMELTERS
Zinc TCs, terms paid to smelters for the costs of processing concentrates into refined metal, have dropped by $5 per tonne to a range of $95-110 basis cost, insurance and freight to China.
In the past month, smelters have bought tonnages below $100 per tonne in confirmed sales in and out of China for the first time in a number of years, illustrating a market that has tightened rapidly this year.
Spot TCs for zinc concentrates have almost halved since last September, declining 47 percent since when terms were $190-200 per tonne.
This month's drop indicates that some smelters are finally accepting lower terms for concentrates after resisting for the past two months.
"It seems the $100 [per tonne] level is well broken, even if I was offering I would never sell at $100 or above," a second trader said.
Smelters have returned to the market to buy concentrates for the winter months, when negotiations for next year's annual benchmark agreements will take place and the spot market slows accordingly.
Stocks of concentrates in China have fallen despite increases in domestic mine production and imports from neighbouring North Korea.
"We've also seen port stocks heavily reduced over the last month so gives you a good idea of the availability," a third trader said.
RMB prices for concentrates sourced domestically in China are currently trading at RMB 4,500-4,800 per tonne, sources said.
"The break-even is around 4500-4600, if the ingot price does not continue to increase, then there might be production cuts," a smelter source in China said.
LME three-month delivery prices for zinc are up 45 percent so far this year and 38 percent on China's Shanghai Futures Exchange.
"Domestic mines are pumping out loads of stuff due to the higher prices… and they are still sufficient," a second smelter in China said.
Smelters who have consistent and sufficient local supply can afford to rebuff low TC offers of internationally sourced material, but others cannot and are now purchasing at those numbers.
January to July imports of zinc ores and concentrates into China are down 32 percent compared to the same period last year at 584,200 tonnes.
"We have not bought from overseas this year, the arb is closed so we would lose money… smelters are not producing at a loss because after a month processing, higher SHFE prices offset the loss on the TC," a second smelter source said.
But TCs have the potential to go lower still several traders said.
"Unless there are any changes on the supply side in terms of people bringing back tonnages - I think we're heading for lower figures," the second trader said.
LEAD CONC PLUNGE TO RECORD LOW, TIGHTER MARKET AMID WINTER STOCK-UP
Low-silver lead concentrates TCs declined to $95-110 per tonne, down from $110-120 per tonne in end-August, the lowest since FastMarkets started pricing in November 2014.
Smelters in China will start to stock up before the winter falls in the fourth quarter due to transportation issues in some of the mining regions, where potentially severe weather such as snow can block trucks for months.
“It's near the winter time so every year at the end of the year mines in northeast of China cannot ship out so it will be very tight in winter time,” said a Chinese lead smelter.
Chinese smelters also expect TCs to continue their downward trend in the next quarter and potential cutbacks will happen if supply is insufficient.
Spot TCs for high-silver lead concentrates have also dropped to $120-130 per tonne on CIF China basis in end-August, down $10 from a month prior.
“The lead concentrates market is getting really tight and this probably there to stay for a while because there's nothing new coming out on lead - additional capacities with KZ and Port Pirie going a little bit forward into next year so supply side is pretty depressed in terms of availability,” said a trading source.
Chinese imports of lead concentrates have increased 15.25 percent to 152,464 tonnes in August, which took year to date imports to 923,489 tonnes, down 10.13 percent year-on-year (yoy), according to China custom data.
(Additional reporting by Vicky Chen, editing by Tom Jennemann)