China Refined Zinc Output Hits Record, Cuts Doubted

China's refined zinc and zinc concentrate output hit a record high in June, and aluminium and copper production rose to their second-highest level ever, data showed on Friday, news that may put downward pressure on prices.

Traders said output in the third quarter could be sustained at high levels by profitable returns for smelters, which are feeding skepticism that small zinc or aluminium smelters will be able to carry through on announced output cuts.

"It's really hard to say whether smelters will honor it. In principle, they don't have the ability to do so, because they have no mechanism whereby I have to listen to you," said Ren Baifeng, an aluminium analyst at metals consultancy Antaike.

"It's not like OPEC or even the European Union."

Output of refined zinc rose 15.5% on the year to 368,100 tonnes in June, lifting output for the first half of the year by 6.5% to 1.9m tonnes, according to data from the National Bureau of Statistics.

Output in the third quarter is likely to remain strong, with Yuguang Gold and Lead starting up a 100,000 tonne zinc smelter on 8 August. That start-up is not affected by a moratorium on constructing new capacity agreed to by larger zinc smelters this week, a Yuguang official said.

Awash with zinc, China has helped pressure zinc futures prices to levels last seen in late 2005. High concentrate output implies Chinese zinc smelters will stay plentifully supplied with raw materials for the next few months.

Concerned about margin-destroying oversupply, smaller zinc smelters agreed last weekend to reduce output by 10% from previously planned levels in the third quarter, following a similar agreement by aluminium smelters.

But larger zinc smelters refused to join them, citing shareholder reporting requirements, among other factors.

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Production of aluminium, alumina and copper hit their second-highest levels ever in June despite rising power and raw materials costs.

Analysts doubt whether either agreement will have much effect, in part because neither specifies a base level. They are also purely voluntary, although sources said Aluminum Corp. of China brought government officials to the meeting on aluminium cuts to try and give the agreement some teeth.

Both aluminium and zinc prices rose on the news of the cuts, but have since returned to previous levels as the market discounted their enforceability.

Aluminium smelters are still profitable in Shandong with aluminium prices at 18,000 yuan ($2,637) a tonne, and in Shanxi at Henan at over 17,000 yuan a tonne, estimated Bonnie Liu of Macquarie Research, encouraging smelters to stay in operation.

August aluminium futures in Shanghai closed at 18,945 yuan a tonne on Friday, while LME futures in London traded at $3,085 a tonne, down 7.3% from an all-time high reached on 7 July.

Rising prices also boosted China's copper output in June. Refined copper production rose 16.4% from a year earlier to 330,600 tonnes in June, just before London futures hit an all-time high of $8,940 on 2 July.

Copper output in the first half of the year rose 19% to 1.82 million tonnes, the NBS said.

Even though fees for refining lead dropped sharply in late June, the relatively low price of imported concentrate still made refining profitable and contributed to a 13 percent rise in lead output, said Antaike analyst Zhang Changhai.

By Lucy Hornby, Reuters