China’s zinc smelters in trouble as demand is curbed, low TCs bite

By Anna Xu

The year ahead is likely to be extremely tough for China’s zinc smelters as they are squeezed between severe tightness in concentrate supply and a decline in the growth of demand for zinc metal, hitting spot prices.

On top of that, smelting capacity is going to rise, adding to the fierce competition for business that has been dragging down treatment charges (TCs).

“The TCs for imported [raw material] will drop to zero soon,” an analyst at Shanghai Futures said.

In response to the pressure, a dozen of China’s largest zinc smelters met on Tuesday December 13 to discuss how they could combat the drop in the treatment charges (TCs).

No solutions were reached at the forum, and market sources believe that the reason for this is that the smelters are not all under equal pressure so it is difficult for them to come to an agreement or copy the actions of the copper smelters, which set up their Copper Smelters Purchase Team (CSPT).

The CSPT, which comprises ten major Chinese copper smelters, holds regular quarterly meetings to set a price floor for their concentrate purchases.

Zinc TCs have been about 4,000-4,300 yuan in northern China, while the TCs in southern China, principally in the provinces of Hunan and Guangxi, were about 450 yuan lower, which means the smelters in that area face far greater pressure than those in northern Inner Mongolia, Metal Bulletin has learned.

In addition, China imported about 1.6 million tonnes of zinc-in-concentrate in 2015, with 6.2 million tonnes of zinc production; against concentrate imports of 1.1 million tonnes with 5.8 million tonnes’ of metal output in 2014, which shows that China’s zinc output relies 75-80% on domestic zinc concentrates, unlike the picture in copper.

The year ahead will see new refined zinc capacity coming on stream in China. The new facilities include the 100,000-tpy Sichuan Huili Lead & Zinc smelter, the 100,000-tpy Xinjiang Shache Hengchang smelter, and the Xiangyun Feilong and Sichuan Sihuan Electrolytic Zinc smelters, that can each produce 50,000 tpy, Metal Bulletin has learned.

However, the supply of zinc concentrate in China is expected to increase by only about 200,000-250,000 tonnes of zinc-contained in 2017, mainly from Inner Mongolia (about 118,000 tonnes), Gansu province (50,000 tonnes) and Xinjiang and Tibet (20,000 metal tonnes apiece).

It all means that the tightness in zinc concentrate supply will make business even tougher for smelters in the next quarter than in the past two months, since treatment charges (TCs) for imported zinc concentrates have plunged by nearly 66% to $30-35 per tonne from $90-100 in October – a drop of nearly 80% from the $135-150 at the start of 2016.

The new supplies of zinc concentrate that are coming on-stream in China in 2017 will not meet the demand for new refined zinc production, judging from the above figures, and the imports of zinc concentrates are unlikely to increase because of the squeeze on profits following the fall in TCs for imported concentrate and the shortage of supplies from outside China in the absence of Glencore’s mothballed output.

Glencore is still not prepared to say when it will restart the capacity it halted in October 2015, according to its latest investors conference call on December 1.

So Chinese zinc smelters are in difficulty, without an easy way out.

“If the TCs for imported zinc concentrate really touch zero in 2017, Chinese smelters will compete even more fiercely for domestic zinc concentrate, and some smelters in China will be forced to cut production or shut down owing to insufficient supply of concentrate, especially those smelters with high production costs,” a Chinese zinc market source said.

Meanwhile, the TCs for domestic zinc concentrates will keep pace with the imported materials, smelters’ profits will not come from the TCs, but instead mainly come from the dividend, according to the formula:

(spot zinc prices – benchmark of 15,000 yuan per tonne) x 20%

But real profitability depends on metal prices. “The premise is that spot zinc prices must stay at a high level [20,000 yuan per tonne or higher], and then smelters are profitable,” the source added.

“If TCs for both domestic and imported materials fall further, zinc spot prices get further support, and the parity between the Shanghai Futures Exchange and London Metals Exchange ends in a significant correction, then the arbitrage window opens and the Chinese market will see more refined zinc imports – like the current situation in the lead market,” another source said.

“Domestic zinc TCs have limited room to decline if zinc prices stop rising. But if zinc prices break through 25,000 yuan ($3,600) per tonne next year, it is likely that domestic zinc TCs will fall below 3,000 yuan,” the source added.

The most-traded SHFE zinc contract reached 25,060 yuan per tonne in late November – its highest level since listing in 2007 – driven by the involvement of investment funds before succumbing to profit-taking ahead of the year-end.

While in the physical market, where it is currently the off-peak season for zinc demand, spot inventories in China were around 210,000 tonnes, 34.4% less than 320,000 tonnes in the same period last year. However, once demand enters the peak season from March to May, inventories could drop much lower, giving prices strong fundamental support. Market sources believe there is a strong possibility that prices could reach the previous high of 25,000 yuan per tonne, or possibly higher at 26,000-28,000 yuan per tonne.

However, it is unlikely that demand for zinc metal will come to the rescue. China’s demand for the metal is expected to slow down in the course of 2017, as Beijing takes steps to dampen the country’s property market because the measures will have knock-on effects on the growth in sales of household appliances and automatic vehicles. It was the growth in China’s real estate and automatic vehicles industries that drove up zinc demand by 2% in 2016.

It is all a far cry from 2016, when zinc was definitely the most dazzling performer among the base metals and its prices on the Shanghai Futures Exchange and London Metal Exchange rocketed by 86% and 90%, respectively, in the course of the year, underpinned by the shutdowns of Glencore, Century and Lisheen zinc mines towards the end of 2015.

The global cuts were helped by Chinese cuts, when, in November 2015, in response to falling prices and the global mine suspensions, ten major Chinese zinc smelters met and agreed to cut 2016 production by 500,000 tonnes, about 3.5% of global zinc output.

Taken together, these actions strongly supported global zinc prices.

The commitment to a production cut was almost completely implemented by Zhuzhou Smelters, the largest zinc producer in China, which cut its output by more than 40,000 tonnes in 2016, having planned to slash output by 50,000 tonnes.

“But few other smelters followed suit, because smelters’ profits increased [compared with 2015] as zinc prices rose, and some smelters even planned to expand their production to chase the high profits to be made, which had not been seen in the zinc market for several years,” sources told Metal Bulletin.

Now the lack of smelting cuts in 2016 could make 2017 a year for smelters to be battling to survive.

(Editing by Kyle Docherty)