Rising possibility of production cuts among Chinese zinc smelters over historically low TCs

Due to the tightening availability of zinc concentrates in the spot market, TCs – the primary income source for smelters, which traders or miners pay them to convert raw materials into refined metal – have been continuously decreasing since the beginning of this year.

Fastmarkets’ twice-monthly assessment of the zinc spot concentrate TC, cif China hit a record low at $(70)-(30) per tonne on Friday May 29, down from $(50)-(10) per tonne on Friday May 8.

Continued unfavorable import arbitrage limited domestic smelters’ ability to secure overseas materials, leaving the competition much more fierce in an already tight Chinese domestic concentrates market.

Fastmarkets’ price assessment for zinc concentrate TC spot, delivered South China was at (100)-100 yuan $(14.77)-14.77 per tonne on Friday May 29, plunging to a historic low from 900-1,100 yuan ($133-163) per tonne on April 24.

Fastmarkets’ price assessment for zinc concentrate TC spot, delivered North China was at 300-500 yuan per tonne on the same day, also dropping to a record low from 1,100-1,300 yuan per tonne a month earlier.

Fastmarkets’ zinc import arbitrage calculation, however, stood at a loss of $566.92 per tonne through the whole month of May, in comparison to a loss of $537.93 per tonne in April; “Buying appetite for domestic materials has become extremely intense recently,” a zinc trader source said. “Smelters are still prioritizing production continuity as their top priority.”

Profit erosion

Almost all the Chinese zinc smelters reported severely eroding profits and warned that they may face greater pressure to cut output in the near term if TCs fail to stabilize, sources told Fastmarkets.

“I heard a few refined zinc producers in China’s Shaanxi province have already operated far below nameplate capacity due to the extremely low TCs, especially those middle and small-sized ones who are highly cost-sensitive,” a trader source told Fastmarkets.

Currently, however, mainstream zinc smelters are still maintaining normal operation, with no obvious cuts reported, Fastmarkets learned from multiple sources.

Some could still make ends meet as elevated sulfuric acid prices generate revenues, while some have already slipped into losses in May, given such a deeply negative TC environment, as byproduct gains cannot fully offset the high cost in purchasing raw materials, according to sources.

The current price of sulfuric acid stayed largely stable following reports that China began restricting sulfuric acid exports in May, after a sharp increase during the past second quarter, but the price remained elevated at around 1600-1900 yuan per tonne on average, sources said.

“Chinese zinc smelters typically generate around 1-2 tonnes of sulfuric acid as a byproduct for every tonne of refined zinc produced, depending on concentrate sulfur content and conversion efficiency,” a zinc trader said. “At current sulfuric acid prices, this has become a significant source of revenue for smelters.”

Sulfuric acid outlook unclear

The outlook for sulfuric acid prices remains unclear, however, with market participants pointing to heightened volatility.

In early May, China’s National Development and Reform Commission and the China Sulfuric Acid Industry Association set a ceiling price of 1,406 yuan ($207) per tonne for May sales of smelter-produced sulfuric acid to fertilizer plants.

But it remains unclear how widely the guidance price has been implemented,” a fifth zinc trader said, adding that some smelters – particularly smaller plants facing production pressures – may not strictly adhere to it.

At the same time, uncertainty over the situation in the Middle East has persisted.

Disruptions and volatility in shipping through the Strait of Hormuz have curbed sulfur supply, while sulfur – a key feed for sulfuric acid production – could also lend support to sulfuric acid prices, Fastmarkets understood from sources.

“Domestic sulfur prices on an exw basis have repeatedly hit new highs recently, adding uncertainty to the outlook for sulfuric acid prices,” a sixth trade source said.

Most market participants expected potential production cuts to emerge alongside smelters’ regular care and maintenance during the coming summer months if TCs continue to deteriorate.

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