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UPDATE China June Copper Output Higher Aluminum Zinc Down A Tad
Jul 15,2010 14:38CST
industry news

SHANGHAI (Dow Jones)--Chinese smelters continued to ramp up copper production in June despite uncertainty over government policies and likely slower domestic and global economic growth, while output of zinc and aluminum was down slightly from May but still up sharply from a year earlier.

Metal production may dip a bit in the coming months due to seasonally weak consumption, when some smelters will undergo maintenance, but output should remain at high levels as profit margins could make them reluctant to idle capacity, analysts said.

China's economy is still growing, planned spending on infrastructure projects is still high, and better demand is expected in the fourth quarter, they said.

"As long as smelters can see some profit margins--it doesn't matter how large the margins are--they won't have much of an impetus to idle capacity or cut production," said Wang Mingyi, an analyst with Galaxy Securities Futures.

China, the world's largest copper consumer, produced 422,000 tons of copper in June, up 6% from the previous month, the National Bureau of Statistics said Thursday. In the first half of this year, copper production totaled 2.32 million, up 19% from the January-June period of last year, it said.

Smelters normally ramp up production in June, before a summer maintenance period when weather hinders progress in infrastructure and other construction projects, analysts said.

"Copper cable and wire makers as well as home appliance makers have all been doing exceptionally well since the start of the year, so it is not surprising to see another solid month," a Beijing-based trader said.

Operation rates at copper cable and wire makers rose to 86.3% in June from 83.3% in May, as downstream orders increased due to a revival in power grid investment. Cable makers' raw material inventories also declined, indicating a revival in demand.

However, cost-conscious zinc smelters slowed their output in June. Weak prices in early June prompted some producers to start maintenance ahead of schedule to avoid losses.

"The average production cost for zinc smelters is around CNY15,000/ton, so when prices fell below that level, small and medium producers would take some action," Wang said.

Wang expected zinc output to be around 400,000 tons per month in the coming months, "as long as prices don't fall significantly and there's (sufficient) raw material supply," as higher demand is expected in the fourth quarter.

Zinc output in June fell 5.8% from the previous month to 425,000 tons, while production in the first half of the year rose 30.4% from a year earlier to 2.48 million tons.

Aluminum output in June was slightly off a record high in May, down 0.7% on month but up 31% on year at 1.41 million tons, according to the data from the statistics bureau.

Some aluminum smelters in Henan province idled capacity in response to rising power prices and slack demand, but the pace of the slowdown was modest.

"We see some smelters cutting production or idling capacity, but at the same time, for those who can access to cheap electricity, they're bringing new capacity online...so the capacity overhang still exists," a Shanghai-based trader said.

For aluminum producers, manufacturing even at a loss is a more economical way to stay in the market, since stopping or substantially reducing production can work against their medium-term interests, analysts said.

"To idle capacity or halt production and then restart, the total cost is simply too high," the Shanghai trader said.

Industry participants estimated that new aluminum capacity this year may reach 2 million tons. Total output capacity last year was around 20.62 million tons.

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