(Bloomberg) -- China’s zinc smelters are facing pressure to make steeper output cuts as they struggle with weak demand and processing fees that have plunged even deeper below zero.
Smelters in the world’s top zinc refiner have already reduced production this year to cope with mounting losses. But that’s so far failed to arrest a sharp decline in spot treatment fees, which are now at minus $35 for each ton of imported concentrate.
Struggling smelters will have to extend output cuts as ore supplies are particularly tight, said Dina Yu, an analyst at researcher CRU Group, “It’s hard to quantify the cuts needed, but smelters are for sure going to suffer through the winter.”
Treatment charges are the amount that smelters get for turning raw material into metal. Just as in the copper market in the past year, zinc fees have plunged as too much capacity chases constrained global supply. The crisis in China’s steel sector — a major buyer of the metal — has added to the bleak picture for zinc.
China produces about half the world’s refined zinc, used to galvanize steel, and smelters representing about 70% of the country’s capacity pledged last month to reduce intake of concentrate in a bid to ease the profit squeeze. Production has retreated since hitting a record in December, though it was still higher in the first seven months compared with a year earlier.
Spot fees on imports are a rough guide to profitability for zinc smelters, who also get supplies through term contracts, or from domestic mines. Those charges have also fallen, though not to the same extent as the in spot market.
The ore shortage may ease “a little bit” next year, said CRU’s Yu. Zinc prices may fluctuate as supply disruption and weak demand cap the upside and downside, she said.
Zinc on the London Metal Exchange is still up about 7% this year, after peaking in May before falling with other metals on a dimmer demand outlook in China. Prices were down 0.3% at $2,833 a ton as of 11:11 a.m. in Singapore on Tuesday.
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This Week’s Diary
Tuesday, Sept. 3
- Nothing major scheduled
Wednesday, Sept. 4
- Caixin’s China services & composite PMIs for August, 09:45
- CCTD’s weekly online briefing on Chinese coal, 15:00
Thursday, Sept. 5
- Saudi Arabia’s Industry and Mineral Resources minister holds briefing in Guangzhou, 13:00
Friday, Sept. 6
- China weekly iron ore port stockpiles
- Shanghai exchange weekly commodities inventory, ~15:00
Saturday, Sept. 7
- China’s foreign reserves for August, including gold
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