SHANGHAI (Interfax-China) -- The Chinese government's policy to increase the export tax on unwrought zinc (2# zinc <99.99%) from a current 5% to 10%, effective June 1, is causing concern that abundant domestic supplies will lower domestic zinc prices and increase international prices, a Shanghai COFCO Futures analyst told Interfax yesterday.
"Zinc exports have been in decline since January this year, resulting in domestic oversupply and sluggish cash prices, and any further reduction in exports will further exacerbate the situation," analyst with Shanghai COFCO Futures, Wang Xiang, said.
China exported 33,624 tonnes of refined zinc in March this year, down 29.83% from February and sliding 58.46% from January.
Zinc exports in the first quarter of the year amounted to 152,916 tonnes, up 399.2% from the same period last year.
China's zinc exports have declined following the introduction of a 5% export tax on 1# zinc (>=99.99% and <99.995%) since Nov. 1, 2006, as well as stronger domestic prices compared with international prices for the first quarter of the year, Wang said.
"China's reduced zinc exports have resulted in abundant supply in the domestic market, but shortages in the international market. China has become a key player in influencing international market supplies," Wang said.
He commented that the new policy would further reduce China's refined zinc exports and exacerbate the domestic oversupply and international shortage situation.
The benchmark spot price for 1# refined zinc on the Shanghai Yangtze River Spot-Market stood between RMB 29,700 ($3,880.32) and RMB 29,800 ($3,893.39) per tonne yesterday, down RMB 500 ($65.33) from the previous day's trading. The price of 0# refined zinc (>=99.995%) was also down RMB 500 ($65.33) with prices ranging between RMB 29,800 ($3,893.39) and RMB 29,900 ($3,906.45) per tonne.
This downward trend following market oversupply was reflected in Shanghai zinc inventories, which stood at 38,154 tonnes last Friday, up 5,051 tonnes from the previous Friday.
LME zinc stockpiles on the other hand fell to 79,425 tonnes on Tuesday, down 425 tonnes from Monday.
Zhu Yiman, an analyst from Shanghai consultancy Metalease, commented that exports would not fall as much as market predictions, since the most traded type, 0# refined zinc, still enjoys a 5% export tax rebate.
0# zinc is the standard form of zinc on both the London Metal Exchange and the Shanghai Futures Exchange.
"Both 1# and 0# refined zinc exports will be excluded from this policy, and exports of 2# refined zinc are both not significantly large and less used in downstream industries," Zhu said.
2# refined zinc is mostly used in the production of casting alloys, batteries and zinc oxide, while 1# and 0# zinc is mainly used for galvanizing steel plates.
Zhu expects 0# zinc exports to rise over the next few months due to current export tax rebates, while exports of 1# and 2# zinc will dramatically decline.
However, there is also market expectation that China will cancel export tax rebates for 0# refined zinc within the year.
The most traded July zinc contract closed at RMB 30,130 ($3,936.5) per tonne on the Shanghai Futures Exchange yesterday, down RMB 1,010 ($131.96), or 3.24% from the previous day.
Commentary
Export tax changes to 2# zinc will not have any price impact on the international markets and, of anything, will help stabilize price on the local market. This is one of the few areas where there is sufficient domestic demand to warrant export control.
Zinc 0# domestic inventories are rising, however, this can be seen as a reserve stockpiling strategy on expected increased high-end steel finished product output. Even as zinc production is expected to grow by 15%, this will still leave a shortfall of 100,000 tonnes on forecast consumption of 3.7 million tonnes this year.
Bear in mind though, expected production of 3.6 million tonnes in 2007 may prove conservative as newly added facilities may not be factored in.
(20min delay)