Chinese zinc smelter shutdowns
Major impact unlikely

Chinese zinc smelter shutdowns are unlikely to have much impact on supply, since mine output is the major constraint on zinc production, according to analysts. However, zinc is still likely to outperform other base metals in 2005, they said, given its tight supply situation and the way its supply and demand fundamentals have lagged other metals in the current bull market.
The announcements recently two Chinese smelters that they would be cutting production totaling 180,000 metric tonnes was cited as one of the factors that drove London Metal Exchange three-month zinc to a seven-year high of $1,297.50/ton. But a floor trader said the story was “a bit of a red herring,” with the move in zinc the continuation of gains made since the start of the year.
Chinese smelters typically shut down some or all of their production around December every, said an analyst, so if the shutdowns are temporary it will have only limited impact.
While the Zhuzhou smelter said it plans to cut 100,000 tonnes of zinc ingot production until after the Chinese New Year, it said this wouldn’t affect its 2005 production target of 280,000 tonnes.
Both Zhuzhou and another zinc producer, Yinli, said that power shortages were behind the temporary shutdown of production. CRU analyst Graham Deller said this problem about affect most smelters, so more closure announcements are likely.
However, he didn’t expect much impact on zinc output. The feedstock for smelters, zinc concentrates, has been the bottleneck on production, and Deller estimates there is about 600,000 tonnes of excess smelter capacity globally.
Smelters have already been forced to lower annual treatment and refinement fees to turn zinc concentrate into refined material to $141/ton during 2004, close to historical lows, from $147/ton in 2003. In a time of short concentrate supply, smelters lower charges in order to compete for material from miners.

Yinli Group suspends 80% operations at Weida Zinc Plant
China’s Guangxi Yinli Chemical & Metallurgical (Group) Co. recently suspended 80% of operations at its 100,000-metric-ton zinc plant in Liuzhou due to power shortage in the region. The zinc plant, Weida Zinc Co., a unit of Yinli, produces zinc powder. “We actually felt a tightness in power supply late last year, when we were even buying power at negotiated prices (which are usually higher than prices offered by the government)...Nowadays, even expensive power isn’t available,” said the official at Weida Zinc Co. As the rainy season hasn’t arrived at the southwestern province of Guangxi, where Weida Zinc is located, the official doesn’t expect the power shortage in the region to ease until May. “We will probably resume operations in May...Hydropower usually replenishes the regional power supply at that time of the year,” the official said. Meanwhile, Longcheng Chemical Plant, a unit of Yinli, maintained its operation rate at the maximum of 100,000 metric tonnes. According to an official at Longcheng "the power shortage has affected the plant to some extent", but no details were available.

Zinc seen outperforming
The rise in the zinc price of more than 60% since the start of the metal’s bull run in 2003 looks spectacular, but less so when compared with a doubling of prices for metals such as copper, nickel and lead over the same period. Two factors - high stocks and a surplus of production -have combined to hold back zinc prices. Both are reversing.
The latest figures from the International Lead and Zinc Study Group show a 225,000 ton zinc deficit in January to November 2004, compared with a surplus of 27,000 tonnes in the same period in 2003. The deficit is starting to eat into stocks of zinc stored at LME warehouses, which have fallen to their current level of 623,075 tonnes from 740,000 tonnes at the start of 2004. CRU’s Deller said zinc stocks would need to fall to around 200,000 tonnes to be really tight on a historical basis. He forecasts a zinc deficit of 450,000-500,000 tonnes this year, so there is a case for seeing these sort of stock levels by the end of the year, he said.
J.P. Morgan said in a research note that the rising zinc price has already triggered 500,000 tonnes of fresh production and a further 1.5 million tonnes could be triggered.
The higher zinc price “has already lifted the potential new capacity and restarts of capacity for the next five years to what we regard as quite worrying levels.” This would take place from the second half of 2005 through to 2007, though the lag effect should keep prices strong in 2005, J.P. Morgan said.

Priced in tight fundamentals
Current London Metal Exchange zinc prices at seven-year highs suggest the market has already priced in forecasts of tighter fundamentals. Otherwise the rise over the past five months is not justified in light of high LME warehouse stocks, base metals analyst William Adams said in a report, referring to an estimated zinc supply shortfall of 250,000 metric tonnes to 500,000 tonnes for 2005. LME zinc warehouse stocks currently stand at 621,075 tonnes. LME three-month zinc rose to a high of $1,305/ton in premarket trade recently, the highest level since October 1997.
Zinc concentrate supplies have been drawn down and are now in short supply, while refined zinc consumption is also outstripping supply, he said. This means cutbacks at Chinese smelters due to power shortages will have a short-term impact only as un-used concentrate stockpiles are sought after by other smelters.
Zinc’s outlook is bullish, but hinges to a large extent on demand for other metals remaining strong and China’s economic growth during 2005. According to Adams, indicators such as car sales and land under construction show that Chinese growth is slowing. The test for zinc should come in mid-2005, when the copper market is expected to switch from supply deficit to supply surplus. “Having one of the major base metals heading lower will weaken overall sentiment in the metals and it will be interesting to see whether the funds are prepared to stick with just a few of the metals, or whether they will see the turn around in copper as the end of the bull market for metals in general,” Adams said.

To remain buoyant in 2005
Deutsche Bank forecasts average zinc prices of $1,300 a metric ton for 2005 prompted by the market’s expected supply deficit. For 2006, Deutsche forecasts an average zinc price of $1,213/ton and $1,102/ton for 2007. “In our view, zinc should be the standout performer among the base metals in 2005,” the report said, with the market seen in deficit of 500,000 tonnes for 2005 and 360,000 tonnes in 2006.
After a period of weaker prices between 2001-03, forecasts have increased partially due to a fall in Chinese net exports in 2004 because of power shortages, a reduction in government export rebates and low smelter treatment charges.
Crucially, a relative shortfall in world mine output has depleted the global zinc concentrate pipeline. This has left annual treatment charges, fees charged to miners to treat zinc concentrate by smelters, at low levels. Low levels of concentrate supply mean that smelters have to lower charges in order to compete for material. At the same time, limited mine capacity growth and several smelter closures in Europe and Australia are likely to limit rises in output in response to higher prices, the report said.