China produces about a third of the world's refined zinc, a...

China produces about a third of the world's refined zinc, a metal used mainly to galvanize steel.

Zinc is less energy-intensive to produce and a much smaller industry than aluminium, but faces similar power supply problems as Chinese generators curb electricity production due to soaring prices and low supplies of coal, their primary fuel.

Some smelters in China were already running at as low as 60 percent of capacity due to weak profit margins as prices fell.

The second source conceded that there was no system in place for monitoring compliance with the pact, however, leaving it up to individual smelters to determine how the implement the curbs.

RESERVES MOVE

"The second decision is that the smelters will call on the central government to launch a national policy on zinc reserves," said the source with a smelter.

Beijing runs similar reserves for other commodities and regularly buys and sells supplies in order to prevent prices from rising too high or falling too low.

But the source added: "I do not think the central government will approve the zinc reserves proposal, I think the priority is for the smelters to control their expansion and curb the oversupply in the market."

Shanghai three-month zinc futures have halved in the past 14 months, despite production losses following the massive Sichuan earthquake in May, as Beijing's policy of discouraging exports of the metal has caused a domestic supply glut. Continued...

But prices rebounded sharply this week on fears that power shortages will hurt production, with LME zinc MZN3 surging 15 percent since hitting a two-and-a-half year low on Tuesday.

China's refined zinc production rose 4.1 percent to 1.55 million tonnes in the first five months of the year. (Reporting by Alfred Cang, editing by Jonathan Leff)