China ramped up refined zinc exports after months of anticipation as a sharp rally in London Metal Exchange (LME) zinc prices improved export arbitrage economics, market sources told Fastmarkets.
The relative strength of LME zinc against prices on the Shanghai Futures Exchange (SHFE) has pushed the SHFE/LME price ratio lower, creating a more favorable environment for Chinese metal to move into overseas markets.
The LME three-month zinc price trended higher through July and August, reaching a fresh four-year high of $3,949.50/t on Wednesday August 26. It closed at $3,885.50/t that day, up by 11.27% from $3,492/t on July 1.
Over the same period, the most-traded zinc contract on the SHFE gained only 7.5%, rising to 26,240 yuan ($3,903)/t on August 26 from 24,400 yuan/t on July 1.
The shift was already beginning to show in trade flows in July, when China swung into a small net export position.
China’s refined zinc exports rose to 9,235 tonnes from 2,345 tonnes in June, while imports fell to around 5,130 tonnes, leaving net exports at approximately 4,100 tonnes for the month.
Market participants said export activity accelerated further in August, with discussions becoming noticeably more active and cargoes increasingly heard moving into export channels.
“I would expect China’s refined zinc exports to reach around 20,000 tonnes in August,” a China-based zinc trader said. “I’ve recently heard of cargoes being shipped out of both Tianjin and Guangdong.”
Improved export economics have also begun to draw Chinese smelters into the market, although trading houses continue to dominate outbound flows.
“We have a few hundred tonnes of material on hand and have been waiting for a workable export window for several months,” a smelter source said on Thursday August 27. “The export arbitrage and margins available this week are attractive enough for us, and we are now preparing the material for delivery into an LME warehouse.”
Fastmarkets reported in June that some large trading houses had accumulated around 30,000 tonnes of domestic zinc since late last year in preparation for a potential export window, but most of that metal had yet to leave China because margins remained too thin and execution risks were high at that time.
LME delivery gains priority over Southeast Asian consumption
Unlike a traditional export cycle driven by stronger overseas end-user consumption, much of the incremental interest in Chinese zinc is currently focused on delivery into the LME warehouse system rather than sales to downstream consumers in Southeast Asia, market sources said.
Regional consumption in Southeast Asia has remained weak, limiting the premiums consumers are prepared to pay for imported Chinese material.
One Chinese trader told Fastmarkets that comparable Chinese zinc cargoes that could command premiums of around $140 per tonne on a CIF Southeast Asia basis last year would now be more likely to trade at around $80-90 per tonne.
The weakness in Southeast Asian demand is also reflected in regional premiums. Fastmarkets’ assessment of the zinc SHG min 99.995% ingot premium, cif Southeast Asia, was $90-130/t on Tuesday August 18, compared with $125-150/t on October 14 last year, when China was also in a brief refined zinc export window.
“China has historically exported relatively limited volumes of refined zinc, so downstream consumers in Southeast Asia are still in the process of becoming familiar with Chinese-origin material,” a zinc trader said. “That makes it difficult for Chinese material to command higher premiums.”
Weak downstream demand has also limited Southeast Asia’s ability to absorb Chinese metal at scale. LME warehouse delivery, by contrast, offers an outlet for significantly larger volumes when the arbitrage works.
“If I am only selling tens or a few hundred tonnes at a margin of just over $20 per tonne, I am only making a few thousand dollars on the whole trade. It is simply not worth the effort,” one smelter source said. “If the aim is to move several thousand tonnes, delivery is much easier to scale.”
Export activity picks up, but caution persists
Despite improved export margins, some market participants remained cautious about committing to exports, with several smelter and trading sources pointing to volatility in the SHFE/LME price ratio and the difficulty of locking in favorable arbitrage levels.
For those without sufficient stocks on hand, the price ratio — and potential margin — could shift before enough material is secured. Shipment schedules and other execution variables add to the difficulty of locking in the arbitrage.
“There is always a difference between the margin you calculate on screen and what you can actually capture in the physical market,” one smelter source said.
“At times over the past few months, I could calculate an export margin of as much as $100-200 per tonne, but that was only theoretical — the question was whether you could actually lock it in,” the source added.
That dynamic favors sellers that have positioned themselves in advance, Fastmarkets learned.
Smelter margin pressure yet to curb ample Chinese zinc supply
The willingness to export also reflects a growing imbalance inside China itself. Refined zinc availability remains ample while domestic consumption has struggled to absorb supply.
Domestic zinc ingot inventories have remained elevated, with stocks in SHFE warehouses totaling 155,954 tonnes on Friday August 21, up by 81.4% from 85,980 tonnes on August 29 last year, according to the exchange’s weekly inventory report.
Meanwhile, Fastmarkets has not heard of any widespread, officially announced production cuts among major Chinese zinc smelters, despite mounting pressure on smelter margins from declining treatment charges (TCs). TCs for both domestic and imported zinc concentrates have fallen sharply to historically low levels amid tight raw-material availability and intense competition among smelters for feedstock.
Fastmarkets’ twice-monthly assessment of the zinc spot concentrate TC, cif China fell to $(90)-(130) per tonne on Friday August 14, from $40-60/t on January 9.
The price assessment for zinc concentrate TC spot, delivered North China, was (700)-(1,000) ($(104)-(148)) yuan per tonne on Friday July 31, down from 1,600-1,800 yuan per tonne on January 30.
The price assessment for zinc concentrate TC spot, delivered South China, was (1,500)-(1,800) yuan per tonne on Friday July 31, also down from 1,200-1,500 yuan per tonne on January 30.
However, some market sources expected a further decline in concentrate TCs and deterioration in smelter margins to prompt production cuts in the fourth quarter.
While no widespread cuts have been announced, some signs of reduced activity have emerged during the current summer maintenance period, with market contacts reporting operating rates of around 70-80% of capacity at individual plants, alongside reduced concentrate procurement.
“I think TCs are approaching the limit of what Chinese smelters can tolerate,” a zinc concentrates trader said. “There have been no explicit production-cut announcements, but I understand that some smelters are already negotiating to take deliveries at the lower end of their annual contracted volumes. I see that as a sign that some smelters are beginning to reduce output.”
