China zinc smelters plan 10 percent output cut to stem price drop: sources

BEIJING (Reuters) - China’s top zinc smelters plan to cut output by 10 percent after holding a meeting in Shaanxi province to address low zinc prices and treatment charges, two sources briefed on the matter said on Thursday.

FILE PHOTO: Residents walk past a zinc smelter belonging to the Dongling Group, in Fengxian county, Shaanxi province, August 22, 2009. REUTERS/Lucy Hornby/File Photo

Lead and zinc companies attended the meeting on Thursday morning, one of the sources said, and both sources said it was not certain that production would actually be cut.

In May, China, the world’s biggest zinc producer, churned out 457,000 tonnes of the metal which is used to galvanize steel, according to the National Bureau of Statistics.

The most-active Shanghai zinc future for August delivery rose by 1.5 percent on Thursday on the prospect of an output cut and was trading at 23,250 yuan ($3,507) per ton, up 0.1 percent, at 0306 GMT on Friday. Prices are set to fall 5.2 percent this quarter, the worst showing since the third quarter of 2015.

London Metal Exchange (LME) zinc was down 0.3 percent to $2,889.50 per ton and is set to drop 11.7 percent for the quarter, also its worst performance since the third quarter of 2015.

In a note on Friday, Helen Lau, an analyst at Argonaut Securities in Hong Kong, said a 10 percent production cut implied that 400,000 tonnes of metal would come out of the market on an annualized basis.

This would “greatly mitigate the risks of oversupply in our view if it is followed through for the rest of the whole year” and should help stabilize prices, she added.

Industry portal SMM, which first reported the Shaanxi meeting, said over 70 percent of Chinese smelters were in attendance.

Benchmark zinc treatment charges fell by 15 percent from 2017 levels to $147 per ton in 2018, indicating tighter supply.

Smelters worldwide win a percentage increase in treatment charges for every dollar the LME zinc price increases above a set basis price, but if the price falls, treatment charges also drop, reducing the fees miners must pay to process their ore.

($1 = 6.6303 Chinese yuan renminbi)

Reporting by Tom Daly; Editing by Christian Schmollinger and Elaine Hardcastle