GF China Commodities Weekly

Transcription

1 GF China Commodities Weekly CHINA ZINC CONCENTRATE SUPPLY WILL BE MORE DEPENDENT ON DOMESTIC MARKETIN 2H16 GFF Commodities Research Contacts : Bonnie Liu; ;bonnieliu@gfgroup.com.hk Zhang Ruoyi; ;zhangruoyi@gf.com.cn Song Xuxin; ;songxuxin@gf.com.cn Yang Fei; ;qhyangfei@futures.gf.com.cn Zhou Minbo; ;zhoumingbo@gf.com.cn

2 GF China Commodities Weekly 1. Treatment charges for imported concentrate to stabilize in the 2H16 Chinese zinc concentrate imports have been decreasing since the fourth quarter of This is due to production cuts by global mines last year, as a result of lower zinc prices and over-importation of zinc ore into China earlier in the year. In 2015, China imported 3.24 million tonnes of zinc concentrate, up 47.2% year-on-year. But in the first six months of 2016, its total zinc concentrate imports fell almost 30% year-on-year, to only 1.0 million tonnes. Treatment charges (TC) for imported zinc concentrate have also fallen markedly along with zinc concentrate import volumes so far this year. Spot TCs are now quoted at $ per dry tonnes, down 34% from $160 at the start of this year. Fig 1.China Zinc Concentrate Import Dropped Off in 2016 As a Result of Poorer Margin Source: WIND, SHFE, LME, China Customs, GFF Research, Aug 2016

3 Fig 2.China Zinc Concentrate TC Source: SMM, GFF Research, Aug 2016 The average TC for domestic zinc concentrate is 4,800 yuan ($721) per tonne in August, down 100 yuan ($15.05) per tonne from the previous month. Average domestic TCs fell 10% year-on-year in August, from 5,350 yuan ($805) per tonne. Spot TCs for imported concentrate have been quoted at $105 per tonne in August, virtually flat from last month. In the first half of 2016, domestic products replaced most of the demand for imported material. The proportion of domestic concentrate in Chinese smelters raw material mix has continued to rise this year, to almost 90%, much higher than the 70-80% range in previous years. Rapid rises in zinc prices this year have led to growing interest among Chinese miners in resuming production, following closures last year because of lower zinc prices. However, zinc prices need to stabilise at current levels before idled domestic mining capacity can come back online. This could also prevent further falls in TC for imported zinc concentrate.

4 Fig 3.China Domestic Smelters Raw Material Mix Ratio Source: NBS, China Customs, ATK, GFF Research, Aug Rapid rally of zinc prices led to domestic mine operating rate to pick up Cuts in output by ex-china zinc mines have led to tighter zinc concentrate availability in the Chinese market since the fourth quarter of With a poor arbitrage ratio between the LME and the SHFE market in zinc prices, less zinc concentrate has been imported into China so far this year. As a result, Chinese smelters are having to use more domestic concentrate. The rapid rally in zinc prices since April has helped boost China s zinc concentrate production, with domestic mines becoming active again and some idled Chinese mines coming back on line since May/June. According to the China Non-Ferrous Metals Industry Assn (CNIA), China's zinc concentrate production was about 470,000 tonnes in June, up 10% month-on-month. In the first six months, local zinc concentrate output totalled 2.2 million tonnes, down 1.6% year-on-year. However, there have been signs of an increase in zinc mines' output in recent months, compared with the start of Chinese domestic mines estimated cash cost is about 210 yuan ($32) per tonne and their total cost about 300 yuan ($45) per tonne. Based on the assumption that a majority of Chinese zinc mines produce ore with 4% grade on average, the total cost of zinc concentrate production is about 8,300 yuan ($1,267) per tonne. The refined zinc price stands at about 17,500 yuan ($2,671) on the SHFE and the spot TC at 4,800 yuan per tonne, while zinc concentrate is trading at about 12,700/t ($1,938/t). Given the 8,300 yuan ($1,267) total production cost for Chinese zinc miners, this indicates that their current profit margin is almost 35%, or roughly 4,400 yuan ($670).

5 Rises in zinc prices have largely increased domestic mines profitability and helped them to step up production. With the product grade of some zinc mines expected to stabilise and improve in the second half, these mines' contribution to China's total production will also climb, after poor performance in the first half. Chinese zinc concentrate output for 2016 is expected to rise by roughly 100,000 tonnes, or 1.5%, from last year. Given that domestic zinc concentrate output fell 1.5% year-on-year in the first half, second-half zinc mine output will need to rise 4-5% year-on-year. Of course, the most important factor determining Chinese zinc concentrate production is whether zinc prices will remain high. Fig 4. China Zinc Con Production Start To Pick Up Since May/June This Year Source: NBS, CNI-A, GFF Research, Aug Local mine restarts accelerate, but environmental control tightens China s domestic mines are believed to have cumulatively cut about 600,000 tpy of capacity between 2013 and Of this figure, 400,000 tpy was shut down permanently because of environmental controls and other factors. The other 200,000 tpy of capacity is likely to restart as zinc prices rise. But as this 200,000 tpy of capacity comes from many small-scale mines that lack cash flow, while many also face stricter environmental checks, the resumption of these mines capacity will take longer than expected. According to market estimation, roughly 360,000 tpy of new zinc mine capacity will come on line before the end of this year, of which 120, ,000 tpy of capacity can start production before the end of the year. However, zinc production realised from restarts and/or new mines coming on line might be limited in the rest of 2016, because of the cash flow challenges and stricter environmental control policy. Environmental supervision groups have arrived in Inner Mongolia, Yunnan and other zinc mine production areas. They recently ordered Hunan Huayuan lead-zinc mines to cease production from

6 July 2016 to June 2017, because of concerns about environmental protection and safety. The Huayuan area produces zinc concentrate containing around 150, ,000 tonnes of metal every year and mainly supplies three key smelters nearby. The halt in production will lead to a reduction of zinc concentrate supply in south China. Fig 5.China Main New Mine Capacity & Production In 2016 (000 tonnes) Mine Location New Capacity New Production In 2016 Caijiaying Hebei Guosen Inner Mongolia Daliang Sichuang Huidong Guojiagou Gansu Others Total Source: ATK, GFF Research Aug Chinese smelters zinc concentrate inventory slightly down in 1H Official statistics shows Chinese zinc concentrate imports totalled 1.0 million tonnes between January and June, equivalent to roughly 450,000 tonnes of metal contained. Over the same period, Chinese production of zinc concentrate contained 2.2 million tonnes of metal. Chinese smelters zinc concentrate inventory is estimated to have fallen by about 350,000 tonnes metal contained in the first half, less than one month of consumption. China's zinc metal output was 3.0 million tonnes in the first half. China accumulated large amounts of imported concentrate in 2015, with the expectation that the zinc concentrate market would run tight into Channel checks showed Chinese overall zinc concentrate inventory could support a minimum of two to three months of zinc production at the start of this year. With the drop of 350,000 tonnes in stocks, current zinc concentrate inventory held by Chinese smelters can still last for about one and a half to two months of consumption, which is still relatively enriched. This report was first published on Metal Bulletin.

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