A meeting was held in Baoji in Shaanxi province on 28 June 2018, attended by forty-eight mining and metals companies, including lead & zinc miners and smelters.
As a result of this meeting, zinc smelters have once again decided to act to improve margins by cutting output in an attempt to lift TCs. Our Beijing office reports that not much time was spent on discussing cutbacks, according to meeting participants, but smelters proposed to cut production by 10% to try to force TCs higher and improve margins.
Chinese smelters cut back to good effect last year
A similar announcement was made in March last year, when a group of major smelters announced that they would take maintenance in March and April due to low TCs and poor profitability. At the time, the announcement was met with scepticism: the previous joint announcement by ten of China's largest smelters, in December 2015, that they planned to cut 500,000t from their combined 2016 refined output, never materialised. TCs were still high and the effect of Glencore's mine cutbacks were yet to affect the concentrate market.
By the time cutbacks were announced in 2017, mine cutbacks were beginning to take their toll and some smelters were struggling to operate normally due to a shortage of concentrate. It is therefore not clear to what extent the cutbacks in 2017 were voluntary. However, what proportion of smelter cutbacks were forced or voluntary last year is less important and they did materialise, with output falling by 6% year-on-year in April 2017 and by 11% in May 2017, briefly lifting revenues to $800/t.
As is the case now, there were several factors at play last year which caused output to fall so sharply in April and May: planned maintenance; low TCs; high power costs; environmental inspections and weak prices. The most notable of last year's closures was Zhuzhou's 100,000t/y smelter which has closed permanently. Other major smelters which cut back included Hangzhong, Zijin, Xing'an, Western Mining, Baohui and Huludao.
The cutbacks had the desired effect for some smelters, lifting spot TCs and revenues (see chart). It even encouraged smelters such as Chihong Zinc and Germanium and Jiangxi Copper to cancel maintenance in June last year to take advantage of higher prices. We believe that Chinese smelters aim for revenues of at least $450/t although as the charts below show, smelters have at times continued to operate at high utilisation rates, despite relatively low revenues.
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