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Zinc Imports by China Capped as Record Inventories Curb Demand

Zinc imports by China, the largest user, may be capped even after the government lowered tariffs on shipments of the metal, as record domestic stockpiles curb demand for overseas purchases.

“Zinc isn’t something China is really short of, like copper, so the tariff cut won’t really help imports,” said Wang Xiang, an analyst at Cofco Futures Co. Net imports may grow 20,000 metric tons, or 7 percent, to about 300,000 tons this year, unchanged from an earlier estimate, Wang said.

Zinc, the worst performer on the Shanghai Futures Exchange this year, has fallen 13 percent as stockpiles climbed to a record. The duty on imports will be cut to 1 percent from 3 percent starting from July 1, the Ministry of Finance said June 24. The metal is used mainly to galvanize steel.

“China’s consumption won’t grow as fast as last year as downstream sectors, including auto, slow down,” said Annett Huang, chief China representative of the International Zinc Association. “So the duty cut won’t be able to boost imports.”

Zinc for delivery in September on the Shanghai Futures Exchange closed today 1.5 percent lower at 17,190 yuan ($2,654), including a 17 percent value-added tax. Three-month zinc on the London Metal Exchange fell 0.8 percent to $2,236 a ton.

Total zinc stockpiles in China reached 628,500 tons in mid-April, and fell to 598,500 tons at the end of June, according to data provider SMM Information & Technology Co. Given the supply glut, domestic prices may be under greater pressure in the short-term, and this means imports will continue to be unprofitable, even after the duty cut, SMM analyst Lei Xiaoli said.

Imports Tumble

China’s zinc imports halved to 323,354 tons last year, while exports totaled 43,143 tons, according to the General Administration of Customs. In the first five months of this year, imports rose 16 percent from a year ago to 141,955 tons.

Zinc for immediate delivery in Shanghai is traded at 17,100 a ton today, while many smelters need the price to reach 17,500 a ton to be profitable, so “perhaps the policy is aimed at curbing domestic capacity growth as this would be another blow to the smelters,” Lei said.

China produced a record 5.27 million tons of zinc in 2010, up 20 percent from the previous year, according to the National Bureau of Statistics. Output in May fell 3.7 percent to 419,000 tons from 435,000 tons in April.

“The weakness in output represents to us conscious smelter production cuts in response to lower demand from the galvanized steel sector,” Barclays Capital said in a research report on June 14. “We view this zinc data as a bearish representation of weak Chinese fundamentals.”

Output Decline

“A power shortage in the months ahead and falling treatment charges may lead to a further drop in zinc output in the coming months, which could be a reason for the cut in import taxes,” said He Qi, head of research at Yinjian Futures Co.

An electricity shortfall this summer may be as much as 40 gigawatts, surpassing the 2004 record, according to State Grid Corp. of China. Power prices for industrial and commercial users in 15 provinces were increased on June 1, according to the National Development and Reform Commission.

Some smelters have brought forward their repair and maintenance plans amid a sluggish market, SMM’s Lei said. Two of the biggest producers in China are Zhuzhou Smelter Group Co. and Huludao Zinc Industry Co.

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