July 4, 2012

 

Poor demand pulls down China's June zinc prices

 

 

Last month, the zinc prices of China weakened slightly as local demand remained below average.

 

On the Shanghai Futures Exchange (SHFE), the benchmark July zinc contract lost RMB200 (US$32) over the month to settle at RMB14,585 (US$2,295) on June 29.

 

"The zinc price may have no chance to rally this year. There is not enough drive for zinc prices unless growth in the property sector recovers," Mo Guogang, a Shenzhen-based metal analyst from China Investment Futures said. Metals demand in China has come under pressure this year because of a slowdown in the manufacturing sectors, as well as a successful government-led campaign to cool the property market. On the Changjiang Nonferrous market, spot prices of zinc slid to RMB14,350-14,400 (US$2,258-$2,266) per tonne on June 29, compared with RMB14,700-14,800 (US$2,313-$2,329) per tonne by the end of May.

 

The falls came after China's zinc ore and concentrate imports plunged by 51.6% on-year or 7.7% on-month in May to a fresh five-year low of 114,304 tonnes, the lowest level since February 2007. "Recent high prices for raw material have led to smelters keeping raw material inventories at low levels, while relatively low treatment charges (TCs) have also made smelters reluctant to import concentrates," according to an analyst of Shanghai Metals Market.

 

Spot TCs for imported concentrate were below US$80 per tonne in April, when importers inked deals for May shipment. Local smelters turn to domestic concentrate when TCs for imported concentrate are below US$100 per tonne, according to analysts. So far this year, spot TCs have remained under US$100 per tonne, having risen from about US$50 in January to about US$95 by late June, according to market participants. The country's daily zinc output also fell by 4.7% on-year or 2.9% on-month in May, to 12,452 tonnes, the lowest level since February last year.

 

Many zinc smelters have cut capacity utilisation to below 60%, market participants said. Hunan-based Zhuzhou Smelter, the country's biggest producer with about 550,000 tpy capacity, is now operating at 60% of its capacity, according to market participants.

 

Henan-based Yuguang Zinc, which has 250,000 tpy capacity, is operating at only 40% of its capacity, they said.  "The sector will not be able to avoid a structural adjustment if zinc prices and TCs remain at current low levels. The current situation is that the sector is still in the middle of destocking, and smelters have very limited profits, meaning they don't have much drive to boost production," Mo said.

 

Premiums for imported zinc have meanwhile continued climbing, reaching as high as US$120-140 per tonne by the end of June, up from US$90-105 per tonne by the end of May. But the premium was probably not reflecting any recovery in demand, but mainly driven by tight supply.

 

"Local demand has been weak, the premium is rising just because there is less zinc available for sale," a major trader said. And the rising premium may also connect with rising local financing demand towards end-June, when many companies are supposed to pay off half-year bank loans.

 

"It is not about demand, but financial deals, as it is better to use zinc [for financing than copper] given that copper results in more losses for that purpose," a second trader said. The basic arbitrage on imported zinc, including VAT and import taxes, rose to US$176 on June 29, up 32% from US$133 at the end of May, according to Metal Bulletin's daily arbitrage indicator.

 

While it is more convenient and common for people to use copper imports for financing deals, arbitrage window has been mostly closed this year for the red metal. "Recent positive arbitrage between the London and Shanghai exchanges has fuelled enthusiasm for imported zinc," Chai Jing, analyst of Jinrui Futures said. Reflecting the scenario, China's refined zinc imports fell by 25% on-month to 21,812 tonnes in May, down by 13.1% on-year.