SHANGHAI (Interfax-China) -- Chinese lead and zinc prices have surged in recent days, after snowstorms forced major lead and zinc smelters to cut production, industry insiders told Interfax today.
The most traded April 2008 zinc contract surged 3.32% to close at RMB 19,580 ($2,719.52) on the Shanghai Futures Exchange per tonne today. The three-month zinc price on the London Metal Exchange increased $90 per tonne to $2,380 per tonne overnight yesterday, while lead finished the day up 4.4% at $2,780 per tonne.
Hunan Province, a major hub for zinc and lead producers in China, has halted the majority of its lead and zinc mining and smelting capacities, due to power shortfalls and transportation disruptions from heavy snowfall.
"It is estimated that as much as 600,000 tonnes of refined zinc capacity has been shut down so far in Hunan, which will reduce zinc production by nearly 50,000 tonnes per month," Shanghai Metalease analyst, Zhu Yiman, told Interfax.
Zhuzhou Smelter Group, the nation's largest zinc smelter by output, had shut down its entire 100,000-tonne lead capacity and slashed its zinc capacity by 50% or 200,000 tonnes by 29 January, while another major producer in Hunan, Shuikoushan Nonferrous, has also shut down lead and zinc production facilities due to power blackouts, Zhu said.
Lead and zinc producers in other provinces including Henan, Sichuan and Yunnan have also been affected by the unusually harsh weather conditions.
To make matters worse, Sichuan Hongda Group, a leading zinc smelter, is currently performing routine maintenance on its plant in Shifang, Sichuan Province, which has a production capacity of 100,000 tonnes of refined zinc per annum, a Hongda production department official, who wished to remain anonymous, said. The whole group has annual capacity of 220,000 tonnes of refined zinc per annum.
"Like other lead and zinc companies, we are running seriously low on raw materials, as most of the lead and zinc mines have been shut down due to the snowfall," the Hongda official said.
The maintenance work is expected to continue through the Chinese New Year holiday, and may decrease monthly production by 50%. However, as the maintenance is part of the company's production schedule for 2008, its production target will not be affected, the official said.
Meanwhile, the Sichuan provincial government released a notice on Monday urging eight energy-intensive industries, including zinc smelting and aluminium smelting sectors, to operate under limited power or temporarily shut down capacity, in order to prioritize power to residential areas.
"The markets have reacted to the supply disruption and lead and zinc prices are climbing firmly. However, January and February is a time when the majority of smelters carryout equipment maintenance, as the period is a traditional sluggish consumption season," Zhu from Metalease said.
The benchmark lead spot price surged by RMB 450 ($62.50) to RMB 21,400 ($2,972.30) a tonne today in Shanghai.
Although the zinc spot price rose by RMB 650 ($90.28) per tonne to RMB 19,650 ($2,729.24) per tonne in Shanghai today, zinc stockpiles in the city currently remain at high levels, as tight transportation in the run up to Chinese New Year has hindered zinc supply to the rest of the country, Zhu said.
London zinc prices fell 43% by the end of last year, from a record high of $4,170 per tonne in May, due to surplus fundamentals.
"We previously predicted that there would be a surplus in China's zinc market in 2008. However, we will need to revise that forecast after the bad weather subsides, as zinc stockpiling may accelerate among downstream users," she said.
There will always be a reaction where there is uncertainty, and these weather induced supply uncertainties have caused price spikes. Production has been affected, although not to the degree that price suggests. As mentioned above; smelters traditionally shut down at this time of year for maintenance and will normally halt production during the Chinese New Year holiday, which last for a week on the mainland. Fundamentals do not support these latest price spikes, and a return to more reflective pricing is expected once the storm clouds have cleared.
(c) Interfax-China 2007. Commentary provided by Interfax analyst David Harman. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at email@example.com or (852) 2537-2262.