Macquarie Research recently attended the 2009 China Lead and Zinc Industry Summit held by China Nonfemet Group in Shenzhen, Guangdong province. There were more than 300 industry delegates at the event. The feedback was generally upbeat regarding Chinese zinc demand for the next three to six months given high levels of confidence about continued strong growth in the Chinese construction and infrastructure sectors.

Macquarie says that overall, the outlook for Chinese zinc demand over the next three to six months remains strong owing to the following factors:

• Galvanised steel mills are expected to stop de-stocking galvanised steel after a period of heavy de-stocking in 1H09 (production and utilisation rates have risen sharply over the past two months)
• Chinese property, construction, vehicle and whitegoods markets are expected to continue to grow strongly in 2H09.

“There was minimal concern by the industry about a potential government policy-driven slowdown of the Chinese economy in 2H09. This largely rested on the fact that headline inflation, GDP growth and exports are not strong/high enough for the government to switch to a neutral or tightening policy setting. However, the major concern of participants is the large stockpile of zinc metal and concentrate built up in China year to date at traders and smelters warehouses.

“Construction accounts for roughly 40% of Chinese zinc demand. The strong recovery of Chinese commercial building sales and floor space under construction in 1H09 has resulted in an increase in the demand for galvanised steel. Our recent meeting with the China Ministry of Construction research unit suggested a very positive outlook toward the Chinese property market in 2H09, with estimated 20% growth YoY in housing new starts and 20-30% growth in floor space completed in the year 2009.

“However for 1H09, Chinese galvanised steel output was down by 3% YoY, suggesting that there was major destocking of galvanised steel in China in the 1H09. The prospect of an end to galvanised steel de-stocking in 2H09 is very bullish for zinc demand in China given galvanised end-use sector demand is growing by 15-20% and galvanised steel is 50% of first-use zinc consumption in China. Indeed, galvanised output is already picking up strongly.”

Most of the steel mills who attened the conference indicated their utilisation rate for galvanised steel has been  greater than 90% since June this year. The producers also suggested that their order books were very strong in 2H09 and had picked up substantially over the past three months.

Over the first six months of 2009, Chinese apparent demand for zinc was up by almost 20% YoY at 2.3 Mt. However, some of the zinc metal was stockpiled at traders and speculators with the expectation of higher zinc prices in the 2H09 along with easy availability of credit from the banks. After accounting for this stockbuild, real zinc demand growth in 1H09 rose by 5% higher YoY, with an annual demand outlook for 2009 of around 8-10%.

Macquarie also reported “producers were concerned about the build-up of refined metal and concentrate stocks in 1H09. We hear there is more than 600,000 t of zinc metal built up in China at end-August, excluding 159,000 t at SRB warehouses, compared with the 300,000 t of stock in total at end-2008, implying 250-300,000 t built up in stocks at commercial warehouses year to date.

“Reflecting the availability of concentrate, the most recent zinc spot concentrate treatment charge is as high as $170-180/t, compared with $80-90/t in April. As Chinese mine supply continues to respond to the recent rise in prices, we expect spot zinc treatment charges will reach as high as $200/t in the coming months. This reflects still-weak concentrate demand world ex China and a slow-down of Chinese buying activities in the 2H09, along with smelters’ higher levels of concentrate inventory and an unprofitable arbitrage ratio for imports. Indeed, most of the smelters who joined the conference said their raw material inventory was six to eight weeks of demand compared with four to six weeks back to the start of the 2Q09.”

Turning to lead, Macquarie says its source reports that over 32 Chinese lead smelting businesses with a capacity of more than 400,000 t of lead (50% of capacity coming from small scale operations) will suspend production at their operations. “This is higher than the 200-300,000t of capacity we reported had been shut in in recent Commodities Comments.”