China's State Council has called on lead and zinc smelters in several regions to merge in a bid to secure better deals from foreign concentrate suppliers.
According to the State Development and Reform Commission, the government is asking larger-scale smelters in southern China, central China and southwestern China to merge to form several major new companies. The proposal would increase the larger smelters' share of national lead and zinc output to 60% by 2011 from the current 40%.
There are more than 700 lead and zinc producers in China, according to the country's statistics bureau, of which the minority are large smelters accounting for 40% of China's total lead and zinc output. However, even the large smelters lag behind foreign producers in terms of production scale, risk management and profit.
A Galaxy commodities analyst said "Chinese smelters are too scattered. It will be a good thing if they can unite and increase resource concentration."
An official with producer Xichang Zinc in Sichuan province said "If Chinese smelters could form a consortium, it would certainly help boost economic efficiency and lower production costs. An official with major Chinese lead and zinc producer Zhuzhou Smelter in Hunan province agreed. The government's suggestion will have a positive impact as collective bulk raw material sourcing would help the industry negotiate better prices."
According to state-run nonferrous metals information provider Beijing Antaike and other industry sources, lack of concentrate and the low lead and zinc content of local material has led larger Chinese producers to rely heavily on imports.
Customs figures showed that China imported 217,29 tonnes of lead concentrate over January to February up by 23%YoY. It also imported 495,824 tonnes zinc concentrate in the first two months of the year, up 25%YoY over the same period. However, Chinese smelters are offered much lower treatment charges than overseas counterparts due to lack of group purchasing power. TCs are the fees paid by mines to smelters for converting zinc and lead concentrates into refined zinc and lead.
Major Chinese zinc producer Huludao Zinc Industry recently settled its 2009 term zinc TCs at USD 125 per tonne, 35% lower than the USD 194 per tonne settled by rival Korea Zinc in South Korea.
A source at zinc producer Hongda Group in Sichuan province said: "Chinese smelters are comparatively more independent in TC negotiations than their overseas competitors, which are more united. However, local industry analysts said Chinese smelters would find it difficult to form consortiums.
A source close to Shanghai Futures Exchange said "Although some Chinese smelters may be willing to merge, others may be reluctant to do so, so it will take some time to consolidate the sector."
China produced 499,800 tonnes refined zinc over January to February 2009, down 12% from the same period of 2008, due mainly to a shortage of concentrate stemming from the shutdown of zinc mines due to the global economic slowdown. However, the country produced 391,900 tonne of lead in the first two months of this year up 14%YoY. The rise was attributed to the completion of new production lines.
Sources: Steel Guru, Platts
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