SMM Zn Survey: Significant Declines in Zinc Output in February

SHANGHAI, Mar. 8 (SMM) -- A recent SMM survey of 39 zinc smelters (total capacity: 4.715 million mt/yr; idled capacity: 120 kt/yr) revealed the following insights:

1) Operating Rates

According to the survey, output at the 39 zinc smelters during February was 312.9 kt, with an average operating rate of 81.7%. Only large smelters with capacity greater than 200 kt/yr reported output increases in February, while medium and small smelters reported declines in zinc output. Operating rates at smelters with capacity between 100-200 kt/yr (including 100 kt/yr and 200 kt/yr) were 82.3% during February, with total output down 13.7 kt. Operating rates at smelters with capacity of 20-100 kt/yr were 74.0% during February, with total output down 2.2 kt.

SMM believes the significant declines in zinc output in February were attributed to the Chinese New Year holiday in February and the fewer number of days in the month. Most domestic zinc smelters maintained normal operations, but zinc smelters with capacity greater than 200 kt/yr not only maintained normal production, but zinc output from new projects which came online in late 2009 has also been added.

In other news, serious drought conditions in some regions of Yunnan, Guizhou, and Sichuan provinces has restricted electric power supply to smelters which rely on hydropower. SMM sources report that the limited electric power supply caused by the drought will continue to affect production at local smelters throughout 1Q 2010 or until the drought eases.

2) Raw Material and Zinc Ingot Inventories

The survey also reveals zinc concentrate supply has become tight in some regions, and that a limited number of lead-zinc ore mining and dressing enterprises have been reluctant to sell goods after average zinc prices fell from RMB 20,000/mt in late 2009 to the current RMB 18,000/mt. The enterprises are also holding back sales based on market optimism with regard to stronger domestic demand and higher commodity prices in 2Q 2010.

According to the SMM survey, 5% of smelters say raw material supply is becoming tighter, and this number of smelters is up compared with a SMM survey in January. In this context, SMM believes zinc smelters with domestic zinc concentrate as raw materials will face tightening supply if zinc prices remain around RMB 18,000/mt. However, the other 95% of smelters say their own raw material stocks can meet production needs, and with 35.9% of smelters reporting raw material supplies are sufficient.

Zinc ingot inventories grew following the Chinese New Year holiday, and the survey reveals that 15.4% of smelters say zinc inventories (including inventories at smelters and in regional warehouses) are relatively high, while only 23.1% of smelters say they have little or no inventory due to cash flow problems, resulting in some sales at lower prices. However, zinc inventories at smelters were generally high, and domestic inventories are expected to fall slightly in the future as zinc imports decline during 2010.

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