HONG KONG (Interfax-China) -- A number of Chinese lead and zinc companies have agreed to cut production by 10 percent between July and September in a bid to reduce the large domestic surplus and boost prices, industry insiders told Interfax July 14.
The 27 lead and zinc smelters and miners convened on July 12 in Shanghai with the Shanghai Nonferrous Metals Industry Association (SNMIA), agreeing to the lead and zinc production cuts, in part by rescheduling annual repairs and maintenance work. The move was also welcomed by the government, as the cuts will help to ensure power supplies for the upcoming Beijing Olympic Games, according to a statement released by the SNMIA on July 14.
The smelters and miners include Sichuan Hongda Co. Ltd., Shaanxi Bayi Hanzhong Zinc Co. Ltd., Western Mining Co. Ltd., Yunnan Luoping Zinc & Electricity Co. Ltd., Henan Yuguang Gold & Lead Co. Ltd., Sichuan Huidong Lead & Zinc Mine, as well as Yunnan Lanping Jinding Lead & Zinc Mine.
Bayi Hanzhong, a zinc smelter with annual production capacity of 120,000 tons, had already shut down part of its zinc smelting facilities by the beginning of this month in reaction to falling zinc prices, general manager of the company, Liu Xuewu, told Interfax.
"The production cuts will likely last throughout the summer [from July to September], a traditional sluggish consumption season. We shut down the part of our production that was running at a loss, which should reduce our zinc output by between 20,000 tons and 30,000 tons," Liu said.
Liu added that recent national power tariff increases for industrial users has raised his company's production costs by RMB 180 ($26.37) per ton.
"[The 27] lead and zinc smelters reached a common understanding that reducing production would be the most efficient way to boost the flagging market," Tong Lesheng, an official with the SNMIA, told Interfax.
China's lead and zinc market is struggling under the weight of a severe surplus, the result of fast capacity expansion led by increased investment in the Chinese lead and zinc mining sector, with downstream consumption unable to keep pace.
"This surplus is the biggest problem facing the industry at the moment. Increasing refined zinc import volumes this year are exacerbating the situation, dampening domestic zinc prices to even lower levels," Tong added.
China imported 19,220 tons refined zinc in May, up 42.98 percent from April. The imports in the first five months amounted to total of 54,090 tons.
The situation may be making life difficult for lead and zinc smelters, but the problems are being amplified for miners, as purchases of lead and zinc ores have shrunk significantly. A number of small miners have already shut down mining facilities, Tong said.
"Smelters have access to lead and zinc concentrate stockpiles, so they will be reluctant to purchase more large volumes of raw materials with prices of the finished products as they are," he added.
Lead and zinc miners at the meeting agreed to adopt production cuts, as well as set a unified pricing system in order to stabilize lead and zinc concentrate markets, according to the SNMIA statement.
Although the country's biggest lead and zinc smelters, including Zhuzhou Smelter Group, Zhongjin Lingnan Co. Ltd and Huludao Nonferrous Metals Co. Ltd., did not attend the July 12 meeting, Tong predicted that major smelters will also have to cut production in the near future, as they are already encountering operational difficulties due to low zinc prices.
With larger market shares, the bigger smelters do exert a greater influence on market prices.
"We will see what type of products these enterprises will actually cut, and then decide if we will follow suit. July to September is usually the period during which smelters conduct maintenance work on equipment, and it may be that the production cut is nothing more than a concentrated period of equipment maintenance," a senior official from Zhuzhou Smelter Group, China's largest zinc smelter, told Interfax.
A sales official with Huludao Nonferrous in Liaoning Province told Interfax his company is not considering slowing production at the moment.
"Huludao Nonferrous is a large state-owned enterprise. As such, any decision about whether it meets its annual production target is a question for the provincial government in the company's annual performance review," the official, who wished to remain anonymous, explained.
The official anticipated domestic zinc and lead prices would be briefly buoyed by news of the production cuts, but said that the cuts would do little to address the heavy market surplus.
"It is hard to say right now whether the production cuts will do much to significantly boost prices or not, as we do not know the extent to which production will actually be cut, or for how long," Heng Kun, analyst with Essence Securities in Beijing, said
Heng predicted 20 percent of domestic zinc smelters will lose money if domestic zinc spot prices fall below RMB 15,000 ($2,197.29) per ton.
"However, major smelters have more advanced sulfur recycling systems, enabling them to produce sulfuric acid more efficiently during the zinc smelting process. Sales of sulfuric acid could offset their losses from zinc ingot sales," Heng said.
Around 1.2 tons sulfuric acid can be produced from the production of 1 ton of zinc and the price of this by-product has surged by nearly 100 percent since the beginning of this year.
As news of the agreement reached traders, the downtrend of zinc and lead futures prices showed a brief halt. The three-month zinc price hit $2,041 per ton on the London Metal Exchange (LME) at 15.03 p.m. Beijing time on July 14, an increase on the previous session of 0.79 percent though is 51 percent lower than its peak last May. London prices of lead stood at $2,015 a ton, up 1.51 percent against the previous session, though lead prices have dropped by 48 percent from a high of $3,880 per ton last October.
The 0# refined zinc spot price closed at RMB 16,050 ($2,351.10) per ton on the Shanghai Yangtze River Metals Market on July 14, up RMB 400 ($58.59) from the previous trading day but down by nearly 52 percent from the peak of RMB 33,360 ($4,886.77) per ton last May. Meanwhile, the 1# refined lead spot price ended RMB 200 ($29.30) higher from the previous day's trading price of RMB 16,600 ($2,431.66) per ton, though the price represents a 37 percent drop when compared to that of last October.
Interfax commentary: Aluminum prices hit historical highs after the news broke that Chinese aluminum smelters would cut production this summer, prompting a similar move by domestic lead and zinc smelters, who have been suffering from low prices. As expected, both spot and futures markets reacted with immediate price jumps on news of the cutbacks. Price growth maybe limited however as many will be inclined to sell up as soon as profit taking becomes possible on both spot and futures markets.
Rather than cutting production outright, major lead and zinc smelters are using the lull in demand to expand smelting capacity so that they can occupy greater market shares when the market recovers. It is also doubtful that all the smelters who attended this meeting will actually implement the agreed production cuts, as the majority of smelters in attendance control their own lead and zinc mines, meaning their operation costs are much lower than smaller smelters and mines, which are the real victims of present low prices.
At the same time, lead and zinc prices are unlikely to rise significantly without a fundamental solution to the massive market surplus. The country's 15 major lead and zinc smelters, including Zhongjin Lingnan and Zhuzhou Smelter, are scheduled to convene a meeting with the Ministry of Commerce and the National Development and Reform Commission (NDRC) in Beijing on July 16 to discuss possible countermeasures to reduce the market surplus and combat falling prices.
(c) Interfax-China 2008. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com
