China's mining sector continues to experience stringent environmental inspections, which have shuttered many smaller and illegal mining and refining operations. Unsurprisingly, production of mined and refined zinc has been reported lower throughout 2017. Antaike estimates that between January and July, mined zinc production was down 4.9% year-over-year to 2.5 million tonnes; refined output, meanwhile, fell 2.0% to 3.5 Mt compared with the year-ago period.
The reduction in domestic output has led to a greater flow of zinc concentrate into China. Refined metal imports also saw significant increases in July and August, both on a monthly and annual basis as the country’s metal market remained tight. This was also evident in the higher year-over-year Shanghai CIF zinc premium, which averaged US$185/t in September, up US$70/t, according to Shanghai Metal Exchange data.
In addition to the crippling effect of environmental inspections on the production of zinc ores and concentrates within China, mine ore grades in China are also believed to be lower than they were historically. Hampered by lower-quality ores with less zinc content, existing mines are not able to produce the same volumes as before, despite favorable zinc prices, which have averaged US$2,788/t for January through September. This compares with US$1,960/t during the same period in 2016. Additional Chinese mine supply that had been expected to come on-stream this year from new projects has been largely absent, partly due to the more stringent controls applied to new operations.
Concentrate imports, from more sources, fill domestic shortfall...
As domestic output has dwindled, Chinese smelters have sought to source more of their concentrate needs from imports. China Customs data shows that total imports of zinc ores and concentrates soared 427,882 tonnes, or 33.9%, year-over-year for January through August. Mostly, this continued to be sourced from the traditional main suppliers, Australia and Peru, which contributed 52.4% to total imports in 2016. However, through August 2017, the share for these two nations has ticked down to 51.0%, with lower volumes from Australia, and despite a sharp rise in shipments from Peru. According to trade data, 38 countries exported zinc ore and concentrates to China in 2017, compared with 30 countries in 2016. With Australia shipping 52,506 tonnes, or 12.4%, less than in the equivalent period in 2016, which reflects lower output in the country, deliveries from India, Iran, Myanmar, Nigeria, Russia, and South Africa have been able to bridge the gap. Meanwhile, Peru, China's main source of zinc ores and concentrates, increased its shipments by 220,982 tonnes, or 81.4%, year-over-year.
This wider universe of concentrate suppliers is indicative of greater competition for concentrates from smelters both within and outside China, especially after the mine exhaustions and price-induced shutdowns that removed production in 2015 and 2016. A limited amount of shuttered capacity has returned in 2017, alongside additional supplies from new operations such as Bisha in Eritrea, which is expected to produce between 86,182 and 95,254 tonnes in 2017, up from 38,500 tonnes in 2016, and expanding ones like Antamina in Peru, which is expected to produce 340,000 to 350,000 tonnes of zinc-in-concentrate in 2017, up from 198,000 tonnes in 2016.
S&P Global Market Intelligence estimates global mine output growing 3.5% in 2017 to 12.5 Mt, with mine production outside China estimated to increase at a faster rate of 5.9% to 8.1 Mt.
…as Chinese refined imports begin to ramp up year-over-year…
Zinc smelters outside China are anticipated to have increased their utilization rates this year, encouraged by stronger zinc prices and resilient refined zinc demand in 2017. So China faces tougher competition for feed concentrate. We forecast that ex-China smelter production will grow 2.4% in 2017 compared with 2016, while Chinese refined output is expected to decline 1.2%. As the country's concentrate market tightness has converted into reduced availability of refined material, there has been an increase in imports, particularly in July and August, on both a monthly and annual basis. Although they were down 19,928 tonnes, or 6.0%, between January and August, shipments of refined zinc in July were 68,045 tonnes, up 51,228 tonnes, or 304.6%, year-over-year, and 65,609 tonnes in August, 40,304 tonnes, or 159.3% higher. This was driven by strong year-over-year imports from Australia.
…and are expected to remain strong over the near term
S&P Global Market Intelligence expects a continued influx of zinc into China over the rest of 2017 and in 2018, as the nation's metal market balance remains in deficit. This is also supported by a healthy differential for prices of metal on the mainland versus imported supplies, as the SHFE-LME arbitrage has blown out recently.
China's appetite for zinc has remained firm, with rampant steel production underpinning the market — about half of zinc's end-use globally is accounted for by galvanizing — as daily crude steel output rates remain near all-time record levels. The automotive sector, a major consumer of galvanized metal, has maintained positive growth so far this year, despite a cut in the tax incentive for small vehicle purchases.
China's Association of Automobile Manufacturers indicates that automotive production was up 4.3% for the first eight months of the year, compared with the equivalent period in 2016, although this compares with double-digit growth rates in 2016. Furthermore, stronger production of zinc-consuming household goods, such as refrigerators and washing machines, continues to support our 2017 China demand growth forecast of an annual 1.3%.
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