With winter approaching and demand being weak, how will the processing fee for die-casting zinc alloy trend in November? [SMM Analysis]

SMM, November 18: As winter gradually approaches, how will the processing fee for die-casting zinc alloy in China trend in November from a cost perspective? Firstly, on the fundamentals side, according to SMM, the operating rate of die-casting zinc alloy in October recorded 47.01%, down 2.05% MoM, due to weak downstream consumption and the National Day holiday. Current downstream consumption remains weak, and enterprises expect the operating rate to increase to 47.89% in November due to the absence of major holidays.

Current weak demand is mainly influenced by two factors: Firstly, although zinc prices have slightly decreased recently, they remain at a high level, leading to weak downstream consumption. Additionally, some enterprises report that downstream buyers are adopting a wait-and-see attitude towards zinc prices, believing there is still room for a decline. As a result, even though zinc prices slightly dropped mid-week, enterprise orders only marginally improved, showing overall stability. Secondly, domestic downstream consumption demand is not strong, and with winter approaching, the real estate sector, which die-casting zinc alloy enterprises heavily rely on, will be affected, further suppressing downstream demand. Under weak consumption, the processing fee for die-casting zinc alloy is expected to remain stable.

However, aside from consumption reasons, production costs are also worth our attention. According to SMM, the current processing fee for enterprises, excluding equipment depreciation, maintenance, and other additional costs, mainly includes natural gas fees (electricity, solid fuel fees), labor costs, transportation fees, taxes, etc. Based on SMM's rough estimate, the current production cost is around 450 yuan, with transportation costs accounting for a significant portion, generally between 22% and 44%, consumption during production process around 29%, taxes around 16%, and labor costs above 11%. Transportation fees vary depending on the actual distance. Additionally, in winter, natural gas fees will rise due to pipeline impacts from low temperatures. Currently, the price of natural gas used by enterprises is about 4.5 yuan/m³, and this price typically rises to above 5 yuan/m³ in winter. Production costs will thus increase by about 20 yuan/mt. Furthermore, as year-end approaches, some enterprises may issue additional wages to workers, further increasing production costs.

Taking 3# zinc alloy as an example, the current SMM 3# zinc alloy Guangdong quotation is 550-750 yuan/mt, with an average price of around 650 yuan/mt. The estimated cost, excluding other metal fees and additional costs, is about 450 yuan/mt, resulting in a profit of around 200 yuan. However, after adding additional enterprise costs, the profit for zinc alloy is expected to be further compressed. The processing fee for other grades of zinc alloy will similarly be compressed.

In summary, given the current situation, the operating rate of enterprises in November is expected to increase by 0.88 percentage points MoM to 47.89%, which will drive an overall increase in production. With the recent increase in production, enterprises should lower the processing fee. However, the recent narrowing of the Shanghai-Guangdong price difference and the zinc-aluminum price difference, along with the widening zinc-copper price difference, has continuously compressed enterprise profits. Additionally, as the processing fee is currently quite transparent, the entry of smelters into the die-casting zinc alloy market has intensified competition. Coupled with the lower processing fee for non-standard zinc alloy, the market share of traditional alloy enterprises is continuously shrinking. Therefore, the processing fee for die-casting zinc alloy is expected to remain stable in the short term.