Production Restrictions in Northern China Spark Low-Grade Zinc Oxide Price Surge, Reaching Near Three-Year High [SMM Analysis]

Affected by the Shanghai Cooperation Organization summit and military parade, environmental protection measures were intensified in northern China, leading to production cuts and shutdowns at steel mills and low-grade zinc oxide plants. This exacerbated the already tight supply of low-grade zinc oxide raw materials, causing prices to surge rapidly. How will low-grade zinc oxide prices trend in the future?

Raw material side, blast furnace operating rates were at their worst YoY, with sustained declines in recent years and a notable drop in blast furnace dust production. Although electric furnace operations showed some improvement, their output currently accounts for only about 10% of total crude steel production, resulting in limited overall output. Starting August 20, environmental protection-driven production restrictions and transport limitations were imposed in north China due to the SCO summit and military parade, with Tianjin and Tangshan most affected. Since most steel mills in north China are located in Tianjin and Hebei, raw material supply tightened further. Meanwhile, steel mills in Shandong were largely equipped with rotary kilns for secondary recycling. In south China, routine maintenance during July and August due to weather conditions exacerbated tight raw material supply for steel dust, driving up prices and providing support for low-grade zinc oxide prices.

Supply side, domestically, in late August, some low-grade zinc oxide plants in Hebei and Henan suspended production due to environmental protection-driven production restrictions. Amid raw material shortages, some enterprises halted operations to stockpile materials, leading to a decline in low-grade zinc oxide production. Internationally, overall low-grade zinc oxide imports remained tight this year, with limited inflows. Some Southeast Asian producers redirected sales to regions like the Middle East and the US. Throughout the year, the overall supply of low-grade zinc oxide was scarce, and high-grade quality material proved particularly difficult to source.

Demand side, affected by the change in raw materials for zinc oxide, overall crude zinc demand remained robust this year, with many companies continuing to increase crude zinc capacity. Most crude zinc producers use low-grade zinc oxide as raw material, while some smelters utilize it as a supplement to ore, leading to strong overall demand and exacerbating the domestic oversupply situation for low-grade zinc oxide. This drove further price increases for low-grade zinc oxide.

Subsequently, as production restrictions ease and the peak consumption season arrives, steel mill operations are expected to rise, which may alleviate the tight supply of low-grade zinc oxide to some extent. However, the absence of imported low-grade zinc oxide as a supplement means the domestic supply gap remains significant. It is anticipated that low-grade zinc oxide supply will stay tight, with prices likely to remain range-bound.