China's strong demand to support future zinc prices - industry insiders
By Ida Chen
Shanghai. September 10. INTERFAX-CHINA - Zinc prices will remain stable in the remaining months of this year on the back of strong demand from China, industry insiders told Interfax at the 2007 Lead & Zinc Summit - Prices, Futures, Market & Development, held in Shanghai over the weekend.
"China will remain the largest zinc consumer in the world, and the country's strong demand for zinc will continue to support zinc prices for the remaining months of this year," Wu Xijun, a senior official with Shenzhen-listed Zhongjin Lingnan Co. Ltd., a leading zinc smelter located in Guangdong Province's city of Shaoguan, said.
"Although there is currently a slight oversupply of zinc [in global and Chinese markets], China's steel industry has recently entered the September peak consumption season, and we therefore expect zinc prices to remain stable in the coming months, with the current price of RMB 25,000 ($3,324.47) per ton acting as a support point. However, we expect to see substantial global oversupply in 2009," Wu said.
Zhao Cuiqing, deputy director of the China Nonferrous Metals Industry Association's (CNMIA) zinc and lead department commented that the global zinc market is currently driven by increased demand, rather than a raw material shortage, and China's rapid industrialization is will firmly support the demand for zinc in the future.
"In addition to consumption from the downstream steel industry, zinc is also widely used in China's hardware manufacturing sector, which consumes between 1 million and 1.2 million tons of zinc per year. For example, China's water tap manufacturing sector consumed 240,000 tons of zinc last year alone," Zhao explained.
Moreover, Zhao predicts that China's zinc production capacity will increase by as much as 500,000 tons this year and by 680,000 tons next year. There is currently 1.25 million tons of zinc smelting capacity under construction in China, with 620,000 tons in the Inner Mongolia Autonomous Region, where various projects are under construction near mines, according to her.
However, Heng Kun, an analyst from Beijing-based Anxin Securities, held a more bullish view of China's zinc consumption for this year and the next due to China's fast growing economy and low stockpile levels, and commented that China's increased investment in the transportation industry is a major factor contributing to the growth in zinc consumption this year.
Heng further commented that there was no significant zinc oversupply in the Chinese domestic market this year, and predicted that zinc prices on both the Shanghai Futures Exchange (SHFE) and the London Metal Exchange (LME) would reach highs of RMB 30,000 ($3,989.36) per ton and $3,500 per ton respectively in the remaining months of this year.
Recently, capacity growth from global zinc mines has outpaced the growth in zinc smelting capacity. This has led to imported zinc concentrate treatment charges (TCs) reaching record highs of between $370 and $380 per ton.
Since then, zinc concentrate TCs in the domestic market have increased to current levels of between RMB 8,000 ($1,063.83) per ton and RMB 9,000 ($1,196.81) per ton, due to increased domestic concentrate production. According to the CNMIA, China's fixed assets investment in the lead and zinc mining sector amounted to RMB 26.72 billion ($3.55 billion) in the first six months, up 75.6 percent from the same period last year, significantly above 57.8 percent growth in the smelting sector.
However, despite high-level TCs encouraging domestic zinc smelters to expand capacity and increase earnings, stricter government policies on pollution control and facility upgrades have limited capacity expansion plans, Zhongjin Lingnan's Wu commented.
The Chinese government policy to control growth in the zinc and lead industry, released in March this year, has so far led to the elimination of between 300,000 and 400,000 tons of zinc capacity, according to an estimate by Xu Jiancheng, president of Guizhou Xianjin Zinc Co. Ltd., a private zinc smelter located in Guizhou Province's city of Liupanshui, a major zinc producing region in China.
"More than 20 small-scale zinc plants have been shut down in my city alone this year. Moreover, the reduction in zinc capacity, caused by the shutdown of so many small smelters, has tightened supply in the domestic spot market in a way that was not previously anticipated by market players," Xu said.
The spot price of 0# zinc ingot lay between RMB 27,800 ($3,696.81) per ton and RMB 27,900 ($3,710.11) per ton in the Yangtze River Nonferrous Metals Market last Friday, noticeably higher than futures market prices.
The most active November contract closed at RMB 26,405 ($3,511.3) per ton last Friday on the SHFE, while the three-month zinc price on the LME fell to a new low for this year to $2,775 per ton last Friday, down 32.81 percent from the beginning of the year.
According to various traders at the 2007 Zinc & Lead Summit, both domestic smelters and traders have amassed substantial zinc stockpiles, which they are reluctant to sell in the market.
"At present, we're looking at tight supply in the domestic Chinese spot market. We are therefore confident of downstream consumption in the future, and contracts offered by our clients have increased recently," a Tianjin-based trader, who asked to remain anonymous, told Interfax at the summit.
Li Junchao, an analyst from Shanghai-based Xinguolian Futures Brokerage commented that domestic smelters and traders could face losses if they sell refined zinc at current market prices, as the market prices has dropped from when many of them imported zinc concentrate or purchased refined zinc from the market.
"Many smelters and traders are stockpiling zinc and hedging their bets against a fall in prices in the futures market, rather than selling refined zinc in the spot market," he added.
Li predicted that despite the downturn in LME prices exerting pressure on strong domestic zinc spot prices, zinc prices will remain at current levels until the first quarter of next year, as the lion's share of new zinc smelting capacity is not due to start full-scale production until the first quarter. However, when full-scale production does commence, domestic prices will fall dramatically.
According to the China Commodities Weekly published by Macquarie Research last week, an estimated 70,000 tons of zinc has been stockpiled in the domestic market over the past few months, including approximately 40,000 tons in bonded warehouses.
China produced 276,300 tons of refined zinc in July, and a total of 2,082,800 tons in the first seven months of this year, up 20.9 percent from the same period last year.
The nation exported 24,198 tons of refined zinc in July, up 83.69 percent from June, and 213,889 tons in the first seven months, lifting 76.4 percent year-on-year. Imports of refined zinc amounted to 16,493 in July, and 85,802 tons in the first seven months, down 55.7 percent from the same period last year.