London 07/04/2016 - Chinese zinc smelters are unlikely to fulfil their promise of cutting refined output by a combined 500,000 tonnes in 2016 as announced late last year, multiple industry sources in China warned.
"It will be really hard for them to cut that much in 2016. At the very least there will not be any significant cuts in the first half of 2016 while domestic treatment charges (TCs) are still profitable," a trading source said.
Since several major smelters have sufficient concentrate for at least one or two months, it is not in their interest to cut output before they have run those stocks down.
"We have no plans to cut in the first half this year as we rely on domestic concentrates, which would allow for two months of consumption," a smelter source said.
Smelters bought concentrate predominantly from domestic suppliers when the arbitrage window between the LME and SHFE was unfavourable and overseas TCs were low.
"Last year, smelters relied more on overseas supplies before Glencore's cut - you saw huge imports of zinc concentrates due to a good arbitrage and high TCs. Domestic concentrates supplies have piled up. But this year the reliance have reversed," a Chinese smelting source said.
Operating rates at the country's major smelters at close to full capacity. Multiple sources pegged average rates at around 85 percent in the first quarter.
Some smelters still plan to cut output but details remain sketchy and some admit that the total cuts will fall short of what was promised. This is because SHFE zinc prices rallied 15 percent to 14,015 yuan per tonne for the June contracts from 12,180 yuan in November when they announced the cuts.
"At prices above 14,000 yuan per tonne, some Chinese mines might return to production, which would increase concentrate supply, which would increase domestic TCs. Smelters will be less reliant on the already tight overseas supply," a second smelter source said.
Only three of the smelters that agreed to make cuts have clear plans to do so. These are for a little more than 100,000 tonnes this year, in line with what was promised.
"We have not heard that others are keeping their promise but... this kind of announcement does not have legal constraints - it totally depends on TCs and market conditions," the second smelter source added.
Spot TCs were at $125-135 per tonne CIF China at the end of March while domestic TCs stood at 5,200-5,400 yuan per tonne on a delivered basis including VAT.
"Domestic TCs have drifted down slightly since the beginning of the year but smelters can still make have profits. For some, the break-even level is at 4,300-4,400 yuan," a third Chinese smelter said.
Teck locked in TCs at $203 on a base price of $2,000 with Korea Zinc for 2016 annual contracts, down from the record $245 settled between Teck and Glencore for 2015 - this indicates that the long-awaited supply deficit will emerge this year.
(Edited by Mark Shaw)