2017 PREVIEW: Zhuzhou makes good on production cuts as Chinese zinc smelters feel the pinch

Zhuzhou, China’s biggest zinc smelter, is meeting its commitment to cut 50,000 tonnes of refined zinc production this year, sources said - and other smelters in the country could follow suit while raw material concentrates become more expensive and progressively scarcer.

Zhuzhou cut refined zinc production by at least 4,500 tonnes in November and by the same volume in December, several sources in the Chinese zinc market told Metal Bulletin. 

“It has scheduled about 50,000 tonnes of zinc production [cuts] and it looks like it will achieve this target,” a mining source selling into the Chinese market said.

“[Zhuzhou is] the biggest smelter so it’s only logical that they have to cut if there is a big shortage of concentrates,” a source with knowledge of the cuts told Metal Bulletin

Zhuzhou could not be reached for comment when contacted by Metal Bulletin.

This year’s massive price gains in zinc have tapered off recently, which is indicative of a lack of concentrate availability for spot delivery and which in turn could prompt smelters to implement the production cuts they proposed last year, sources said.

In November 2015, the ten largest Chinese zinc smelters – including Zhuzhou – said they would cut refined zinc output by a combined 500,000 tonnes in 2016, equalling about 3.5% of global production. But these cuts for the most part have not materialised so far.

“Other smelters may also have cut but they do not want to openly discuss it. Metal production cuts will be more obvious in the first quarter of 2017,” the second mining source added.

China’s refined zinc output in January-November 2016 was in fact 1.2% higher year-on-year. A rapid rise in Shanghai Futures Exchange prices has enabled smelters to maintain profitability despite collapsing treatment charges (TCs) for concentrates.

After ending 2015 at 13,440 yuan ($1,935) per tonne, SHFE zinc prices gained 86% to a peak of 25,055 yuan per tonne on November 28.

TCs – the discounts on the zinc price paid to smelters for the cost of processing concentrates into metal – have collapsed to $30-50 per tonne this week from $150-165 in December last year. With the supply of raw material to China drastically reduced, recent tenders for material have been awarded at ever-lower rates.

Still, three-month LME and SHFE prices have declined 13% and 16% respectively from their late-November peaks.

“Smelters in China are unhedged so they have made profits from [price] speculating with free zinc units,” an international zinc concentrates trader said. “When prices are $1,500-1,600 per tonne, most probably they can get it right but when the price is already at $2,800 per tonne the probability of further rises is lower.”

To cut or not to cut? 
On December 13 this year, a group of 12 Chinese zinc smelters met to discuss how to combat lower TCs.

“Current treatment charges for zinc concentrate do not cover the smelters’ normal production costs… nevertheless these zinc smelters will maintain their long-established pricing models with mining companies,” the smelters said, laying out a four-point action plan.

But if prevailing market conditions endure, some smelters may be forced to reduce output due to a lack of available raw material, sources said.

“If TCs remain low, I think some smelters in China will cut production,” a Chinese smelter source who attended the meeting said.

“There will be more cuts around Chinese New Year,” a second smelter in China said.

Still, several factors remain in question, primarily whether Chinese domestic mine production will get a boost from improved conditions for miners in the country.

Zinc mine supply in China will grow by 4.9% in 2017 from 2016 while supply outside China will rise 6.6% year-on-year because some mines that were idled in 2015 and 2016 will restart and some new projects will come online, International Lead and Zinc Study Group (ILZSG) director Paul White predicted in November. 

Still, it could be a case of short-term pain for long-term gain for Chinese zinc smelters, with expansions at mines such Gamsberg and Dugal River expected to come on-stream. And Glencore’s 500,000 tpy of idled capacity could return at some point.

“Most smelters will suffer to produce [refined] material in the first half of next year… but at some point in the first or second quarters metal stocks will decrease and prices and premiums will go up further,” a second mining source said. “Then Glencore will bring back some cut production.”