BEIJING (Scrap Monster): A surprising decline in zinc concentrate imports to the lowest level in over four years as per April Chinese trade data released on Tuesday. Key for LME zinc prices is whether this was supply or demand induced.
“It is was a function of lower demand from smelters. Chinese refined zinc production has been contracting in recent months owing mainly to early maintanence in response to soft demand and low treatment charges (TCs), the main source of smetler revenue,” Barclays stated in a commodities snippet.
Chinese smelter margins have been under pressure from low TCs, which have reduced the incentive to process all available concentrate, especially when metal stocks are high and had been rising.
Weaker refined production has had the biggest impact on demand for imported concentrate, which has fallen by 31% y/y this year so far, much more than the 3.7% y/y fall in smelter production. Meanwhile, domestic mine output has continued to grow very strongly indeed, rising by 20% y/y.
Barclays continued that, “Chinese concentrate production has been stronger than we expected thus far this year, suggesting there is a risk that concentrate supply surprises to the upside.”
So what does this mean for metal prices?
The ultimate driver of the metal market balance is raw material availability. In a market like copper, mine supply has not kept up with metal demand resulting in many years of metal market deficits and high prices.
By contrast, in the zinc market there is currently more mine supply than metal demand. Whether all that concentrate gets turned into metal and therefore how big the metal market surplus will be is determined in part by smelter profitability. If miners are willing to hold concentrate stocks then it will limit the size of the metal market surplus.
Otherwise, the self-correcting mechanism will be for treatment charges to rise and smelters to increase production again.
“For the moment, at least, the reduction in Chinese refined output has tightened the domestic market a little and SHFE stocks have started to fall, but until global mine production falls consistently short of metal demand (due perhaps to lower prices or a structural weakening in mine production growth) the zinc market will remain well supplied,” Barclays concluded.
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