SHANGHAI, Nov. 15 (SMM) -- A recent SMM survey of 41 zinc smelters (total capacity 5.125 million mt/yr; idled capacity 80 kt/yr) revealed the following insights:
1) Operating Rates Continue to Increase
According to the survey, output at the 41 zinc smelters during October was 348.7 kt, up slightly compared with 341 kt in September, and with output from the 41 smelters accounting for over 70% of China's monthly zinc output, according to data released by the China Nonferrous Metals Industry Association (CNIA). The average operating rate was 82.94% in October, up from September levels.
Operating rates during October at larger smelters with capacities above 200 kt/yr were 88.35%, up slightly from September levels. Operating rates at medium-size smelters with capacities between 100-200 kt/yr (including 100 kt/yr and 200 kt/yr) rose to a record high for 2010 of 89.32%, up from September's 88.20%. Finally, operating rates at smaller smelters with capacities between 20-100 kt/yr were 59.35%, down 3.6% from September levels.
There were four significant events concerning zinc smelters during October.
First, Shaoguan Smelter suspended production in October. Shenzhen Zhongjin Lingnan Nonfemet Company suspended production at its Shaoguan Smelter on October 21st due to thallium pollution. According to SMM sources, “Nanhua” brand zinc from Shenzhen Zhongjin Lingnan Nonfemet Company is highly regarded and has strong market recognition in the Guangdong market, with monthly sales exceeding 10 kt. In this context, the closure of the Shaoguan Smelter had an impact on Guangdong spot markets, with spot zinc prices increasing rapidly upon the news. Spot zinc prices were about RMB 19,100/mt on October 21st, then climbed to RMB 19,700/mt on October 22nd, with some deals even made at RMB 19,800/mt. Some downstream producers using “Nanhua” brand zinc as raw material in south China say traders in Guangdong have been reluctant to sell goods since October 22nd, and that supply of “Nanhua” brand zinc was unavailable in the market.
Inventories at downstream producers are generally limited, so they faced shortages of raw materials. If Shaoguan Smelter fails to resume operations soon, downstream producers will be unable to maintain production, even with orders in hand. Since other brands enjoy high prices and high transportation costs, producers may have to turn to imported zinc from Australia and South Korea. Although the effect from the closure of the Shaoguan Smelter has eased somewhat during November, Danxia Smelter has stopped production for unit maintenance and will remain offline for one month, affecting zinc supply in south China.
Second, some zinc smelters have resumed operations even as mine inspections continue in Hunan province, with smelters using existing zinc concentrate inventories. According to company sources, zinc smelters are able to use existing raw material inventories to maintain production, but the existing zinc concentrate stocks can only maintain production until January or February 2011. If mine inspections continue for the foreseeable future, production at zinc smelters will be negatively affected by shortages of raw materials.
Third, power restriction policies in Guangxi province have been eased. Although the Guangxi provincial government is still restricting electricity supply, some smelters in this province say output has increased and operating rates are up as well.
Fourth, Sichuan Huidong Lead-Zinc Mine will be controlled by Western Mining Group. Western Mining Company said recently its controlling shareholder, Western Mining Group, plans to acquire an 80% stake in a medium-size zinc and lead mine in Sichuan province at a cost of RMB 2.176 billion. Western Mining Group mainly produces #1 zinc and will likely expand zinc smelting capacity at Sichuan Huidong Lead-Zinc Mine, which mainly produces #0 zinc, to 100 kt/yr.
2) Tight Raw Material Supply Conditions Continue to Improve
According to the survey, most smelters say raw material supply was adequate in October and that only 12.2% of smelters felt raw material supply remains tight. Rising zinc prices has created strong incentives for mine operators to produce and sell goods, so the number of smelters reporting tight raw material supplies has fallen. In general, domestic zinc concentrate supply during 2010 has been sufficient. According to China Customs, China's imports of zinc concentrate have reported a negative YoY growth rate since June 2010, with imports from January to September at 2.42 million mt, down 12.9% YoY. Most domestic smelters say raw material supply is sufficient, an indication of increasing supply of zinc concentrate in China.
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