China’s historical lead and zinc trading patterns were upended in the first half of this year as imports collapsed and exports surged.

The country flipped to being a net exporter of refined zinc in April-June for the first time since 2014. Year-to-date refined lead exports are the highest since 2007.

Outbound shipments of both metals in refined form are subject to an export tax – 10% in the case of lead, 15% for zinc – which has acted as a major restraint on exports in the past.

That so much metal has made it through the tax barrier says much about the level of scarcity in the rest of the world.

Physical buyers have been paying record premiums for both lead and zinc as smelter outages open up gaps in Western supply chains.

Chinese exports have helped plug some of the deficit and are likely to continue doing so until acute regional imbalances are resolved.

The transfer of eastern surplus to western deficit began first in the lead market.

China’s exports of refined lead started accelerating over the third quarter of 2021 after two years of muted trade activity.

China shipped 95,000 tonnes to the rest of the world last year and it has exported another 88,000 tonnes so far this year, including 15,000 tonnes to Turkey in January and 30,000 tonnes to the United States in June.

Both European and U.S. markets have been characterised by extreme physical tightness for many months.

London Metal Exchange (LME) stocks remain low at 39,550 tonnes. European locations hold just 2,525 tonnes, and U.S. locations zero.

Shanghai Futures Exchange lead stocks, by contrast, built to a record high of 205,898 tonnes in September last year. They have since fallen to 76,154 tonnes as nearly 180,000 tonnes of metal has departed for other markets in the intervening months.

The east-west imbalance may be less pronounced but it is still there and physical premiums remain stubbornly high, Fastmarkets assessing the U.S. Midwest premium for 99.9% purity metal at $480 per tonne over the LME cash price CMPB0.

Last month’s big export shipment should bring some relief for North American buyers.

European buyers, meanwhile, will welcome the return after nearly a year’s outage due to flooding of the Stolberg smelter in Germany.

Trade house Trafigura, which is in the process of buying the plant, said the restoration programme at the 155,000-tonne per year facility will be completed in the current quarter.

However, it will take time for the supply chain to heal and lead demand from the replacement battery sector is relatively recession-proof, meaning a reduced hit from the manufacturing slowdown pressuring other industrial metals.

The West seems likely to need a bit more of China’s surplus in the coming months.

China’s exports of zinc have been less dramatic at 60,000 tonnes over the first six months of 2022, but the inversion of previous trade patterns is more pronounced.

Since the imposition of the 15% export duty in 2008 the country has been a consistent net importer of refined zinc, the annual tally coming in between 400,000 and 700,000 tonnes over the last decade.

Imports have collapsed by 82% to just 49,000 tonnes so far this year as the arbitrage has swung in favour of exports to a metal-starved Western supply chain.

The Portovesme smelter in Italy has been idled since late last year, and other European smelters are flexing run-rates as they navigate soaring power costs.

North American supply, meanwhile, has been reduced by lower output at CEZinc’s Canadian refinery, the company issuing its second production downgrade in as many quarters due to a shortage of manpower and operational problems.

It is now expecting to produce 225,000-240,000 tonnes this year, down from original guidance of 270,000-280,000.

LME live stocks are bombed out at 26,400 tonnes, translating into persistent time-spread tightness. The cash premium over three-month zinc closed Wednesday valued at $94 per tonne.

European physical premiums are holding their highs either side of the $500 per tonne mark even as spot business quietens over the summer period, according to Fastmarkets.

China’s exports have included a 10,000-tonne shipment to Turkey in January, attesting to the regional tightness.

Most of what has left China however has only made it to Taiwan, which is noticeably the only LME warehouse location that has seen any consistent warranting inflows in recent months.

This year’s east-west rebalancing of the global zinc market has so far been less about the direct impact of China’s exports as the diversion of metal that would otherwise have been soaked up by the world’s largest user.

China still looks well supplied with zinc, Shanghai exchange stocks standing at 101,190 tonnes as of last Friday.

Local demand has been dented by a weak construction sector, which uses zinc in the form of galvanized steel.
Usage should pick up heading into a seasonal peak for construction activity but weak signals from the property market and the potential for more COVID-19 lockdowns may mute the uplift.

Western supply problems, on the other hand, show no signs of being resolved until Europe’s energy crunch abates, which no-one seems to expect any time soon.

China’s trade in refined zinc could end up being a tug-of-war between a recovering domestic market and the continued call on metal from Europe.
Source: Hellenic Shipping News