SHANGHAI, Feb. 21 (SMM)--Capacity expansion at zinc smelters has been slowing in recent years, and should continue to fall in 2011. New capacity will still be greater than 1 million mt/yr, but actual operating rates will likely be low.

According to SMM sources, actual operating rates at new zinc smelting capacity during 2010 were only 50%.  The capacity growth rate was only 6.7% and down from over 10% in 2008 and 2009.  In addition, of the new capacity built in 2010, over 33% was from projects postponed from previous years, including the 120 kt/yr zinc project of Hechi Nanfang Nonferrous Metals (Group) Smelting.

According to SMM data, over 60% of new capacity scheduled to come online during 2011 will be projects delayed from the previous year.  The growth rate of new capacity during 2011 will remain low and actual operating rates should be unchanged from last year for three major reasons.

First, during 2011, China will implement new policies to adjust industrial structure and to curb inflation.  Zinc smelters will become more cautious towards investing in new capacity.  The actual operation of any new capacity will also depend on economic conditions and not automatically come online when completed.

Energy savings requirements and power restrictions will also limit capacity expansion. During 2H 2010, most smelters cut output or even suspended production due to power restrictions. New expansion projects were postponed and any new projects put into production did not run at full capacity. Smelters believe restrictive policies from 2010 have eased somewhat, but will still impact operations during 2011.

Second, recent industrial policies affected capacity growth. China will continue to limit growth of nonferrous metal capacity during the 12th Five Year Plan in order to promote structural adjustment within the industry. In addition, regulations now stipulate that in order to expand lead and zinc capacity, the smelters must supply internally a minimum of 30% of raw materials, which will significantly restrain capacity expansion at most enterprises.

Raw material supply is becoming a serious problem for smelters, so many are making efforts to increase self-sufficiency of raw materials to not only meet industry regulations and maintain normal production, but also to reduce costs. A large number of enterprises will acquire mines or increase self-sufficiency through mergers and acquisitions, as well as through purchases, but both take time and will cause the delay of new capacity expansion.

Third, capacity expansion is subject to market forces. According to SMM sources, most smelters believe zinc prices will continue to fluctuate widely during 2011. Zinc prices will likely rise given quantitative easing policies in the US, but prices will still be subject to new policies and market fundamentals, inventory and output surpluses. 

To sum up, as the growth of zinc smelting capacities during 2011 will be limited and the actual operation rate will be low, zinc output surpluses are expected to be reduced, and fundamentals will also improve.