Decent profits reduce likelihood of refined zinc production cut despite falling prices

SHANGHAI, Mar 16 (SMM) – Treatment charges (TCs) for zinc concentrate remained at high levels despite moderation, and this supported the profits at Chinese zinc smelters and reduced the likelihood of a production cut,  while the coronavirus impact has weighed on zinc prices since the Chinese New Year holiday and spurred speculations that smelters may reduce output to prop up the market.  

Spot zinc prices have slipped nearly 3,000 yuan/mt from a high level before the CNY holiday, to 15,690-15,790 yuan/mt as of March 15, the lowest level since the second half of 2016. China’s zinc inventories, meanwhile, have surged on the back of delayed resumption of downstream demand and operations amid the COVID-19 outbreak.

However, profits at zinc smelters remained underpinned by relatively high TCs, which rebounded in 2018 and kept climbing since 2019 on rising overseas ore supplies. Most smelters reported profit margins of around 1,000 yuan/mt as of March 15, and the operating rates also rebounded given the gradual return of workers and easing inventory pressure of sulphuric acid after the resumption of logistics 

The zinc concentrate TCs eased slightly in some regions as the extended CNY holiday affected mining operation and falling zinc prices prompted some mines to keep cargoes back from the market.

TCs for domestic, imported zinc concentrate (source: SMM)

SMM research showed that five concentrated zinc production cuts, mostly combined cutbacks agreed by major producers, have occurred since 2008, and all were triggered by plunges in zinc prices and sluggish TCs. 

SMM forecasts refined zinc production across Chinese smelters to rise 12,100 mt from February to 465,100 mt in March. 

While some zinc miners have faced losses and planned to arrange production based on the development of near-term zinc prices, decent profits are likely to sustain the production enthusiasm of zinc smelters in the short run.

Profit at Chinese mines and smelters (unit: yuan/mt, source: SMM)