FOCUS – China looks to North Korea to plug Glencore zinc concs gap

Chinese zinc smelters are increasingly turning towards North Korea as a source of concentrates supply rather than traditional overseas partners while treatment charges (TCs) in the international market remain soft, market observers claimed.

While Chinese imports of zinc ores and concentrates have fallen 32 percent in January-July from last year, according to official statistics, North Korean imports have jumped 184 percent, making it China’s third-largest supplier – it has leapfrogged Mongolia, Morocco and Bolivia.

North Korea’s emergence as a partner for Chinese zinc smelters and strong growth in Chinese mined production this year could negate mine output cuts from Glencore, Nyrstar and MMG, which have been the main drivers of zinc’s 45-percent price gain this year.

“North Korean material is going to the smelters in northern China such as Huludao, Yuguang Zinc and Zhuzhou, importing through trading houses and priced around 5,000 yuan. The grade is around 45 percent and some are in the form of ores through border trading… there are factories dealing with that in Northern China,” a smelter source in China said.

China, which is largely self-sufficient in refined zinc but imported 3.2 million tonnes of concentrates to fuel smelted production in 2015, is a key swing market for zinc concentrates, taking material largely from Australia (1.3 million tonnes) and Peru (928,000 tonnes).

But the closure of MMG’s Century mine helped create a shortage of low iron concentrates globally while Glencore’s slashing of production at its George Fisher and McArthur River mines, all in Australia, has left a supply gap of low-silver zinc concentrates preferred by Chinese smelters.

In turn, spot zinc concentrate TCs – fees paid to smelters to compensate the costs of turning concentrates to metal – have dropped sharply to below $100 per tonne on a cost, insurance and freight (CIF) basis to China in September from $190-200 per tonne last September.

TCs in the Chinese domestic market have also fallen to 4,500-4,800 yuan per tonne for China-mined concentrates, indicating tightening supply there, although they have recently started to level off.

The overall drop in imports also indicates that smelters are eschewing lower numbers from international sources while refined production cuts have not yet materialised.

North Korea is home to the Geomdeok mine, which produces roughly 220,000 tonnes of zinc concentrates per year and has an estimated zinc-lead ore resource of 266 million tonnes.

The secretive dictatorship is currently subject to UN trade sanctions due to its policy of enriching uranium and expressed intention to develop nuclear weapons.
Countries abiding by the UN Security Council Resolution 2270, including China, are unable to import iron ore, coal and other minerals from North Korea. But zinc and sister metal lead are exempt.

Indeed, while North Korean zinc ore exports of 55,502 tonnes in 2015 to China made up just 1.7 percent of total imports of 3,237,265 tonnes, according to Chinese customs figures, this has risen significantly since international TCs started to fall.

In the first seven months of this year, imports of North Korean zinc ores of 66,822 tonnes made up 5.75 percent of China’s 1,163,152 tonnes of imports.

The lack of any concrete information out of North Korea and the potential opacity of data given to the market by the Chinese government mean that figures are difficult to verify. But given current concentrate market conditions, such business makes sense, sources said.

“It shows the levels of interest from the Chinese smelters… there is a definite shortage in the market,” a trader told FastMarkets.

China’s gain, Glencore’s pain

China’s growing ability to source zinc concentrates more widely may hurt zinc miners such as Glencore that traditionally supply smelters there or see spot TCs rise to reflect zinc concentrates becoming less of a sellers’ market.

When Glencore published its half-year results in August, analysts peppered CEO Ivan Glasenberg with questions about when and how the company will bring zinc production back.

They questioned him on whether higher market prices have resulted in a boon for the Chinese zinc mining industry rather than making smelters there submit to lower TCs for imports.

“The Chinese producers’ production is about 6 million tonnes – we don’t think they have the ability to expand significantly because it is mostly smaller mines,” Glasenberg said at the time.

But the increasing self-reliance of the Chinese zinc smelting industry could see a shift in global concentrates supply-demand dynamic.

“Domestic mines are also pumping out loads of stuff due to higher prices,” the smelting source added.