By Interfax China
21 Jul 2008 at 07:04 AM GMT-04:00

The government may encourage zinc concentrate imports as domestic supplies peter out in tough market conditions.

HONG KONG (Interfax-China) -- The Chinese government may encourage zinc concentrate imports as domestic supplies peter out in tough market conditions, industry insiders told Interfax on July 21.

Falling spot zinc prices in China have forced many low-grade zinc miners to shut down production and most high-grade zinc miners are reluctant to sell zinc concentrate to smelters due to shrinking profits, Zhu Yiman, a senior analyst from CBI China, a metals market information provider, told Interfax.

Domestically produced zinc concentrate made up 60 percent of all zinc concentrate used in Chinese refined zinc production last year.

Zhu predicted that zinc concentrate imports will increase in the remaining months of this year.

The 13 biggest zinc and lead smelters in China met on July 16 in Beijing, calling for the government to ease restrictions on zinc and lead concentrate imports in the face of tightening domestic zinc concentrate supply.

"Though some of these zinc smelters own their own zinc mines, domestic zinc concentrate supply cannot meet the combined production capacity of these big smelters," analyst Hu Yongda, from Antaike Information, told Interfax.

"The government may not subsidize zinc concentrate imports, but it may simplify import procedures," said an official surnamed Zhang, from MCC Huludao Nonferrous Metals Group, a leading zinc smelter.

"Our company may import more zinc concentrate over the second half of this year than in the first half, as domestic zinc concentrate supply is tight and imported zinc concentrate offers us bigger profit margins than domestically produced zinc concentrate," Zhang said.

Half of MCC Huludao Nonferrous Metals Group's zinc production relies on imported zinc concentrate, according to Zhang.

Domestic zinc smelters will run at around 80 percent of full production capacity between June and August, partly to conduct yearly maintenance work on equipment and facilities, and partly due to tight zinc concentrate supplies from low spot prices, according to Zhu.

China's zinc concentrate imports in the first five months of this year came to 856,793 tons, an annual increase of 19.15 percent year-on-year. In the first six months of 2008, China produced 1.919 million tons of zinc, up 6.5 percent year-on-year.

Interfax commentary: The predicted increase in zinc concentrate imports should not mask the fact that Chinese zinc smelters are running under capacity at the moment.

The increase in zinc concentrate imports in previous months is not simply the result of declining domestic supply, but is also linked to increasingly favorable prices of zinc concentrate sourced from overseas.

Although smelters are complaining of declining profits due to lower prices for refined zinc, they still receive treatment charges of between RMB 7,000 ($1,025.33) and RMB 8,000 ($1,171.80) per ton of refined zinc from zinc smelters. This means that that depressed zinc prices are being felt most by low-grade miners. In the meantime, we expect that large-scale miners will try to improve production efficiency.

So far, production cuts from miners and smelters are showing no sign of strengthening zinc futures in China, and may well have little effect.