RPT-UPDATE 2-China zinc smelters slash output as margins bite
reuters.com
Thu Nov 6, 2008 3:37am EST
By Polly Yam
HONG KONG, Nov 6 (Reuters) - Stung by the twin woes of plunging prices and shrinking margins, China's Zhuzhou Smelter and Huludao Zinc are slashing output, joining a growing list of Chinese metal firms battling weak demand at home and abroad.
The cut comes as a slowing domestic economy and growing fears of a world recession have forced galvanised steel makers to lower output, pulling down world zinc prices by 33 percent since late September.
And more cuts are on the cards, analysts said.
"Many smelters are cutting production," said Lan Ke, analyst at Southwest Securities. "But one thing is sure, that demand is weak as galvanized steel production falls."
Zinc prices MZN3 on the London Metal Exchange have dropped 75 percent since a record high in late 2006 as fears of a global recssion amid tighter credit markets threaten to hit world demand for industrial metals.
So far, more than 1.35 million tonnes, or nearly a third of China's 5 million tonnes of primary zinc production capacity, are slowing production, which could cause metal output to fall short off the expected 3.9 million to 4.0 million tonnes this year, smelter officials and analysts said.
On an annual basis the cuts by Chinese smelters add up to 450,000 tonnes. Analysts said more reductions may be seen in coming weeks as prices are expected to stay soft and supply of concentrates from northern mines fall in the winter.
To see production cuts at smelters, please click factbox. [ID:nHKG351475]
Galvanized steel makers were the top users of zinc in China.
Zhuzhou (600961.SS: Quote, Profile, Research, Stock Buzz) has reduced production 20-30 percent at its 400,000 tonnes smelting facilities, a top executive at its trade department, said. Its new 100,000 tonnes of capacity was still under trial run and producing very little metal.
"We cut output because it was making losses. Anyone who holds stocks has made a loss," the executive told Reuters.
He added that loss-making zinc production, coupled with tight credit from Chinese banks, was squeezing smelters' cash flows.
An official at Huludao 000751.SZ said the firm had shut a 200,000-tonne zinc facility since last month and was cutting production at a 60,000-tonne plant. Another 130,000-tonne zinc facility was running normally, the firm told Reuters.
Spot zinc prices in China have fallen 34 percent since late September to 9,200 yuan a tonne because of weak domestic demand and low world prices, while zinc for delivery in three months on the London Metal Exchange traded at $1,165 a tonne on Thursday.
Chinese output of galvanized steel fell 8 percent to 10.21 million tonnes in the first eight months.
In Shanghai alone, more than 60,000 tonnes of refined zinc, nearly a quarter of China's monthly output,is stored in warehouses despite smelters' reduced production, traders said.
CONCENTRATE SUPPLY FALLING
Smelter officials said low prices were discouraging mines from selling concentrate, the main material for refined zinc.
"We have concentrate stocks until the end of this month. If we fail to buy enough, we will have to cut more production," a manager at the trading department of Hanzhong Bayi said.
The firm was cutting production by 10 to 20 percent at its 120,000-tonne smelter.
Yuguang Gold and Lead (600531.SS: Quote, Profile, Research, Stock Buzz) is repairing a 100,000 tonnes facility and the repairs will finish in mid-November. But the timing to restart production at that facility remains uncertain, a manager at its trade department said.
Smelters that own mines are in no rush to cut production.
Zhongjin Lingnan Nonfemet 000060.SZ, which operates a low-cost mine in Guangdong and 190,000 tonnes of zinc facility has no plan to cut production, although metal prices are below its mine production costs, a trade manager said.
The firm has delayed construction of a 100,000 tonnes zinc facility to mid-2009 from January, he said.
Baiyin Nonferrous and Chihong Zinc (600497.SS: Quote, Profile, Research, Stock Buzz) are also not planning to cut production, company sources said. Baiyin has capacity of 165,000 tonnes a year and Chihong has 160,000 tonnes.
"Now is not the peak of production cuts. If prices fall below 8,000 yuan a tonne, the cut would expand massively," said Qian Can, an analyst at China Futures. ($1=6.826 yuan) (Editing by Sambit Mohanty)
© Thomson Reuters 2008 All rights reserved |
