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Continuous Rebound of Lead-zinc Industry Aggravates the Shortage in Concentrate Supply

October 31, 2016 Source: China Nonferrous Metals News Authors: Yu Zhonghua Feng Juncong Peng Tao

Introduction:The prosperity index of non-ferrous metal industry in China’s economy in September released by China Non-Ferrous Metals Industry Association is 26.1, up by 2.3 or 9.6% from the previous month. Despite still hovering around the “comparatively cold” range, the prosperity index has been on the rise consecutivelyfor 10 months and gets close to the lower edge of “normal” prosperity range within the industry, thereby turning the scale of industry downturn within a short period.

The prosperity index of non-ferrous metal industry in China’s economy in September released by China Non-Ferrous Metals Industry Association is 26.1, up by 2.3 or 9.6% from the previous month. Despite still hovering around the “comparatively cold” range, the prosperity index has been on the rise consecutively for 10 months and gets close to the lower edge of “normal” prosperity range within the industry, thereby turning the scale of industry downturn within a short period.

As ofthe end of August, the overall recovery trend of lead-zinc industry is primarily consistent with the prosperity index of non-ferrous metal industry, in that, despite of decreased output of lead-zinc mine on a year-on-year basis, the lead-zinc industry is featured by the smaller decline, continuous price rise, comparatively increase of main operation income, remarkable profit growth and downstream consumption result of lead-zinc better than the expected.

2016 Lead-zinc Industry

Continuous rise of prosperity index

The overalloutput of minesison a year-on-year decline while the month-on-month growth begins to slow down recently

Data from the National Bureau of Statistics suggest that, from January to August, 2016, the total domestic output of zinc concentrates is 2.989 million tons, down by 3.5% YOY. In August, the output of zinc concentrates is 409,000t, presenting a month-on-month growth rate of 1.1%, which drops slightly. Raw material inventory of the smelter is continuously decreased when compared with that at the beginning of the year when the raw material was sufficient for production for 2-3 months. At Q3, inventory level is lowered continuously, with the smallest inventory that can only support production for less than half a month.

From January to August, 2016, the accumulated domestic output of lead concentrates is 1,390,000 tons, down by 5.6% YOY. In August, the output of lead concentrates is 198,000t, enjoying a slowdown growth rate of 4.2% as compared with preceding month.

The output of lead-zinc metals is divisive on the year-on-year basis but shows different trend on the month-on-month basis recently.

According to the data from the National Bureau of Statistics, from January to August, the domestic output of zinc concentrates is 4,053,000 tons, presenting a decrease of 1.0% YOY, with the rate of decrease in line with previous two quarters essentially. In August, the output of zincconcentrates is 516,000t, showing an increase of 2% as compared with last month. It changes the trend of reduced month-on-month performancein July and maintains the trend of month-on-month growth.

From January to August, 2016, the domestic output of lead concentrate is 2,835,000 tons, up by 7.3% YOY. From the perspective of the monthly chain relative ratio, due to the impacts of environmental supervision, the output of concentrate in August is 351,000tons, down by 4.9% on a month-on-month basis. Among others, the output of primeval lead and secondary lead is lowered by 3.4% and 8.4% on a month-on-month basis respectively.

Compoundprice of lead-zinc rises significantly while Q3 witnesses an obvious increase ofthe lead price

Since 2016, LME zinc leads d the increasing trendof base metals and its dominant contract’s price jumps to 2,377 USD/ton at the end of September from 1,609 USD/ton at the beginning of the year, presenting a strong growth rate of 47.73%. Among these, the opening and closing price of LME zinc of three-month contract at Q3 is 1,817 USD/ton and 2,377 USD/ton, respectively. The seasonal average price is 2,256 USD/ton, with a year-on-year growth rate of 21.9% and month-on-month growth rate of 17.3%. ZN trend is basically consistent with the buying trend, with its growth rate slightly less than that of buying operation. The dominant contract price of SHEF zinc soars to 18,255 Yuan/ton at the end of September from 13,385 Yuan/ton at the beginning of the year, with a growth rate of 36.38%. Among these, the opening and closing price of ZNM dominant contract at Q3 is 16,410 Yuan/ton and 18,255 Yuan/ton, respectively, with the average price of 17,468 Yuan/ton, up 17.3% YOY and up 15.9% on a month-on-month basis.

The opening price of LME lead increased to 2,124 USD/ton at the end of September from 1,793 USD/ton at the beginning of the year, up 18.4%; dominant contract price of LME lead encounters stagflation at the first half of the year.In Q3, since the Federal Reserve Board declares the interest rate to be maintained unchanged, the global output of lead concentrates dropped while the lead price is supported and increased by a pick-up in the downstream lead demands and reverses the declining tendency at Q2 and rose persistently after hitting the bottom. The quarter-on-quarter growth rate and month-on-month growth rate at the end of the quarter is 9.0% and 18.8%, respectively. Meanwhile, PB price jumps to 15,445 Yuan/ton at the end of September from 13,170 Yuan/ton at the beginning of the year, with a accumulated growth rate of 17.27%. In Q3, the quarterly average price of PBM boasts growth rate of 7.3% on a month-on-month basis. In particular, the last week of Q3 shows the strong pull-up and even reaches the price level of 15,000 Yuan/ton. When compared tothe end of Q2, the closing price on September 30 increases 17.2%.

Continual increase of the main operation income and profits

Dueto the continuous rise in the compound price of lead-zinc, both business operational situation and prosperity gradually improved. According to the data of the National Bureau of Statistics, from January to August 2016, the accumulated main operational incomes in the lead-zinc industry are RMB 258.4 billion, up1.8% as compared with last year. Among these, the main operational income in August is RMB 35.9 billion. In the first half of the year, the main operational income of the whole industry keeps growing continuously and the growth rate of mining and mineral processing enterprises is obviously faster than that of smelter. In Q3, the main operation income of the whole industry generally keeps stable.

From January to August 2016, the accumulated realized profits of lead-zinc industry are RMB 10.04 billion, up by 14% as compared with the same period of last year. In August, realized profits are RMB 1.49 billion and profits of lead-zinc industry remarkably increased. Although the absolute value of profits earned by mine enterprises is larger than that in the smelters, its growth rate is smaller than that in the smelters.

Investments on the mine smelting begin to rebound notably

From 2016 onwards, the lead-zinc price is on the rise, hence industry profits increase obviously and the industry shows greater enthusiasm in technical innovation, new construction, reconstruction and expansion. The data of the National Bureau of Statistics shows that the accumulated fixed asset investments of the lead-zinc industry from January to August are RMB 36.1 billion, up by 4.9% YOY. In August, fixed asset investments of the lead-zinc industry are RMB 6.16 billion, up by 175% as compared toRMB 2.24 billion in January. Investments in the mining and mineral processing are RMB 3.63 billion, accounting to59% of the aggregated investments. Investments in the smelting are RMB 2.53 billion, accounting to41% of the aggregated investments. The aggregated investments of mine enterprises are higher than those of smelters.

Downstream lead-zinc consumption picks up gradually and exceeds expectation

According to the data of the National Bureau of Statistics, from January to August, 2016, the domestic accumulated production of coated sheets and galvanized plates is 38.64 million tons and 35.94 million tons respectively, up by 11.2% on a year-on-year basis. After the mid- September, downstream industry in Jiangsu and Zhejiang begin to resume production gradually, giving rise to the better end-use consumption. And it is expected that production of galvanized plates will increase continuously. In general, other primary fields scarcely change. The ordersof zinc die cast alloy are in poor performance and zinc die cast alloy is only purchased based upon the demands. Zinc oxide market’s performance remains low while utilization rate of the overall capacity of the tire enterprise decreases. As the weather gets cold in September, there presents a greater demand for the zinc oxide.

The performance of lead consumption field also exceeds expectation. From January to August 2016, the national outputof lead-acid battery is about 139 million kVAh, up4.2% YOY, with the growth rate larger than that from January to July. From the perspective of end-usedemand, other industries like the energy storage of base station(except the motorcycle industry) continue to show growing demands for lead, which is obviously better than the previous market expectation of a negative growth in the production of lead-acid battery.

2016 Q4

The prosperity of lead-zinc industry will improve continuously

Shortage of supply of concentrates will increase

It is recently predicted by the International Lead and Zinc Study Group (ILZSG) that, the global zinc concentrates output in 2016 will reduce to 13.27 million tons, down by 1.4% and zinc concentrates output in countries and regions, excluding China, will decrease by 9.4% significantly. Antaike presumes that, the global output will reduce by 800,000tons throughout the year. Although partly mines, such as Vedanta, Star Company and Antamina, boast a recovery increase in the production, hardly increase output remarkably. The zinc concentrates supply in China will continue to remain tight. It is expected that, mining and processing capability of lead concentrates will increase150,000tons metals in 2016. Mines, including Sanguikou, Rongda, Dongshengmiao and Jiashengpan in Inner Mongolia, are capable of contributing to the output in Q4, thereby will alleviate the supply shortage of lead concentrates to a certain degree.

However, since the stock of the previous years has been depleted at the first three quarters of 2016, the concentrates stock at home and abroad maintains at the very low level. As Q4 is in winter season, smelters in Northern China are at the season of winter storage and there is a high possibility of worsened supply shortage of concentrates within a short period of time.

Smelting output will continue to grow

In Q4, China encounters the tight supply of raw zinc concentrates.The domestic material supply of zinc concentrates in Q4 is quite tight. While based upon previous experience, the smelters reduce their production capacity only when processing fee is far too low. Since Q4, the mainstream processing fee and settled processing fee are about RMB 4,700 and over RMB 5,000, respectively in Northern China based on the benchmark fee of RMB 15,000. Hence, it is unlikely for the smelter to reduce output actively when raw materials’s supply is not in shortage. In addition, 240,000tons’ production capacity of Western Mining and Hulun Buir Chihong is put into use in August respectively and will contribute to improving the domesticoutput in Q4.

Similarly, althoughthe supply of lead concentrates in Q4 is tight, it is still sufficient to support the normal operation of lead smelterscontinuouslyand the growth rate of primary lead output is expected to slow down.But in light of recovery increase in the lead price in Q3, the output of secondary lead output will increase notably.

Lead-zinc consumption shows a good performance in general

Zinc consumption is closely linked with economic development in China and the possibility of stability is predicted by market insidersin Q4 of 2016. With the gradual production resumption of the enterprises and pick-up in the end-useconsumption, it is anticipated that the growth rate of galvanizing consumption in Q4 will be activated slightly. Besides, due to the temperature drop in winter, there will be a greater demand for the zinc oxide.

In 2016, the collection of “consumption tax” has curbed some consumption capacities of storage battery and exhausted the battery demands in the field of electric bicycle in advance. In Q4, lead-acid battery market will go into the stage of “emotional recovery” relating to the collection of “consumption tax”. Furthermore, as the telecom operators build a great number of new base stations and replace the used base station and equipment, lead-acid battery in the communication field will again boast ahigh-speed growth. Q4 is also the traditional peak season for the consumption. Therefore, it is expected that, the downstream lead consumption in Q4 will be promising.

Lead-zinc price varies in the overall trend and remains different in the short-term trend

Due to the shortage at the supply end of zinc concentrate, it is impossible to improve tight supply effectively in Q4. Besides, such shortage is escalated by “winter storage” of smelters and sound downstream consumption. It is projected that, the zinc price will be fluctuated and increase gradually in Q4. The mainstream fluctuation range of LME three-month zinc futures price is between USD 2,150 and USD 2,500 per ton while the mainstream range of ZNM dominant contract price is between RMB 15,500 and RMB 19,000 per ton.

Given the tight supply of lead concentrates, lead consumption in Q4 is optimistic, with certain increase potentials. It is projected that, in Q4, the zinc price will show the trend of fluctuation before slight increase and its average price will surpass that in Q3 but a round of price adjustment is expected in November. The operation range of LME three-month zinc futures price is between USD 1,900 and USD 2,250 per ton while the operation range of PB dominant contract price is between RMB 13,500 and RMB 16,500 per ton.

To sum up, the “fundamentals” in Q4 will support the upward increase of lead-zinc price in a fluctuating manner, but attention must be paid to avoid the speculation of funds against the fundamentals. Furthermore, production resumption of Glencore and increase in the interest rates by the Federal Reserve Board are the potential risk factors that suppress the price.

Overall prosperity of the industry may be improved continuously

In general, lead-zinc price in Q4 of 2016 is at the high level throughout the year and production enthusiasm of lead-zinc mines in China is improved. Raw materials supply of the smelters remains tight within a short period of time but does not exert a significant influence on the overall operation. Benefiting from the recovery of downstream consumption, zinc demand will embrace positive growth on a month-on-month basis. Due to the seasonal demands or high demands from the energy storage battery of base station, lead demand is also likely to continue to grow. With firmer staged foundation of economic development in China, Chinese lead-zinc market will be improved continuously on the macro surface and support the health and continuous industrial development on the fundamentals. In Q4, lead-zinc industry investment is expected to be increased continuously and industry prosperity may be improved persistently and slightly.

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