China May Cancel VAT Export Rebate and Levy Export Tax on 0# Zinc
By Ida Chen
12 Nov 2007 at 10:21 AM GMT-05:00
SHANGHAI (Interfax-China) -- The Chinese government is considering cancelling the current 5% value-added tax (VAT) export rebate and imposing a minimum 5% export tax on 0# refined zinc (>=99.995%) in January next year, in order to slow investment growth in zinc smelting projects and curb the country's huge trade surplus, industry insiders told Interfax today.
"The policy is still being discussed by relevant government departments and major smelters. However, as smelters, we hope the existing policy can be retained," a senior official, surnamed Wang, from the trading department of Hunan Zhuzhou Smelter Group, China's leading zinc smelter, said.
Wang expressed concern that the policy may burden domestic zinc smelters with unprecedented difficulties. "The domestic zinc smelting sector will face the same problems as the lead smelting sector is currently facing," he added.
The policy will result in a significant drop in China's zinc exports and tight global supply, which will in turn dramatically increase both global zinc prices and zinc concentrate prices. Domestic zinc smelters will have no choice but to accept soaring imported concentrate prices, and will probably be forced to reduce production, Wang explained.
Zhu Yiman, an analyst from Commodity Business Intelligence China, a Shanghai-based commodity market service provider told Interfax that "it is only a matter of time before the government cancels the VAT export rebate on 0# zinc, as other types of refined zinc, namely 1# zinc (>=99.99% but <99.995%)>
Zhu further commented that major smelters met with government departments last Friday to discuss policy feasibility, but no details have been released to date.
0# zinc is the standard form of zinc on both the London Metal Exchange and the Shanghai Futures Exchange, and accounts for the majority of China's zinc exports.
China imported 104,729 tonnes of zinc in the first nine months of this year, slumping 56.1% from the same period last year, while exports climbed 43.7% to 248,233 tonnes. As a result, net exports reached 143,504 tonnes. Exports in September tumbled by 44.03% from August to 12,325 tonnes, down 18.5% from the same period last year.
The country produced 2.696 million tonnes of refined zinc in the first nine months, up 19% year-on-year, creating ample supply that has dragged zinc futures to record lows since their debut on the Shanghai Futures Exchange in March this year.
Zinc for immediate delivery at the benchmark Shanghai Yangtze River Market traded at an average of RMB 22,500 ($3,036.44) per tonne today, down RMB 200 ($26.99) from last Friday.
"Zinc futures in both China and the West have to face the problem of a zinc production surplus as well as rising stockpiles in recent weeks. The domestic zinc spot price is also down," Deng Hong, with China Brilliant Futures, said.
© Interfax-China 2007.
It looks like the potential for another large run-up in Zinc prices in the new year...then get out before it crashes back to .50 cents per lb.says: Melion1
Reasons for Zinc's Weakness
There are a number of reasons why the price of zinc has been weak the last year. Here are some of them:1) Too far, too fast -- From late 2005 to late 2006, the price of zinc tripled. It moved up too far too fast, so it was bound to correct from that parabolic rally. It went from the best performing metal in 2006 to the worst performing one in 2007.
2) A surge in new supply from mine restarts and San Cristobal -- As a result of the huge rally in 2005-2006, a number of old mines that were shut down when zinc prices were much lower because they were uneconomic then have been reopening, as much higher zinc prices made them economically viable again. Another significant new source of zinc is the San Cristobal mine in Bolivia, which just recently started production after many years of development. The market is forward looking, so this surge in new supply has been factored into the price of zinc, even though it hasn't yet resulted in an oversupply situation, at least as measured by LME inventories.
The surge in new supply is only temporary, and doesn't provide the consistent growth in supply needed to meet the growing world zinc demand and offset depleting reserves at existing mines. There are only so many old mines that were uneconomic at lower metal prices and had enough reserves left to be mined economically today. After San Cristobal, the pipeline of sizable zinc projects for the next few years is pretty empty -- Metalline Mining's Sierra Mojada project is probably the only world-class sized zinc project that will be proven feasible in the next year or so. Despite the recent additions to supply, LME inventories indicate that the zinc market is still tighter than other metals, as it had a huge supply deficit to overcome from the last few years -- LME inventories have dropped nearly 90% over the last 3 1/2 years.
We'll soon see if the oversupply situation everybody and their brother have been saying is coming in the zinc market actually materializes, and how long it lasts. Per Scotia Capital's China Commodities Weekly, "China has been sucking up the world’s growing supply of zinc mine output, turning it to refined metals, and then using it for domestic consumption."
3) The perception that China produces more zinc than they can consume -- With the weakness in the zinc price, there has been a plethora of bearish articles on zinc focusing on China increasing their supply of refined zinc without mentioning that they've had to import far more zinc concentrate in order to increase their refined zinc output. China has significantly ramped up their smelting capacity, but their mine supply hasn't been able to keep up -- it's much easier to build a smelter than it is to find and develop a sizable zinc deposit. As a result of the ramped up smelting capacity, China has significantly increased their refined zinc output, but they've had to import a lot more zinc concentrate from foreign mines in order to do so.
The headlines discuss China's increased refined zinc output as if they had a glut of zinc when in actuality their imports of zinc concentrate have increased 178% YOY in the first 9 months this year -- that's an enormous increase in imports, dwarfing any refined zinc exports (China actually became a net refined zinc importer in September despite all these concentrate imports). Once the growth in global zinc mine output slows after the recent supply surge, China may not be able to continue to increase their concentrate imports, and we may have a zinc crisis on our hands rather than the expected zinc glut.
4) Fear of global recession -- With the subprime crisis and weakness in the U.S. housing sector, many fear that the world is headed for recession. Many argue that a U.S. recession means we'll get a global recession, which would mean less demand for base metals. However, even if the U.S. goes into a housing-led recession, that doesn't mean the world will go into a recession, though global growth may slow. Even if China's growth slows dramatically from 10%+ to even 5%, that would still likely mean increased demand for base metals, as the growth in base metals demand has been coming from developing countries, not the U.S. The U.S. doesn't drive the global resource markets any more -- with their huge savings rate and increasing consumption, China is becoming less and less reliant on the U.S. for their own growth. China and other developing countries have a heck of a long way to go to come anywhere near the standard of living of the U.S.
5) Technical shorting of zinc futures -- For most of this year, technical hedge funds have been shorting zinc futures based on a head and shoulders top pattern with a target in the $.90-1.00 area. In the fairly small futures market, these funds dominate, and yesterday's Metals Insider says, "The CTA systematic fund community is running short of this market to over 90% of historic capacity and they are not alone, we suspect." With everybody short zinc, it has been pressured down, but should rebound strongly when the shorts cover. Since zinc hit as low as $1.0185 overnight, it looks like the technical bottom is close.
6) A short-term surge in Chinese zinc exports ahead of an expected tax law change -- The recent uptick in LME zinc inventories may not be an indication of increased supply, but may instead be a reflection of a scramble to beat the impending tax law change in China where refined zinc will no longer receive a 5% export rebate but will instead be assessed a 5% export tax. As Metals Insider explained yesterday, "In China particularly, traders were looking for production and exports to rise ahead of a probable removal of export tax rebates and the possible introduction of new export levies."
Once this short-term surge is over and the tax law change is implemented, look for zinc to rebound, especially with the world's largest producer of zinc likely to export much less refined zinc, if any. Despite the short-term selling it's causing, this tax law change will be bullish for the price of zinc longer term: "The policy will result in a significant drop in China's zinc exports and tight global supply, which will in turn dramatically increase both global zinc prices and zinc concentrate prices. Domestic zinc smelters will have no choice but to accept soaring imported concentrate prices, and will probably be forced to reduce production, Wang explained." (http://www.resourceinvestor.com/pebble.asp?relid=37724)
And then we have this report:
China's strong demand to support future zinc prices - industry insiders
By Ida Chen
Shanghai. September 10. INTERFAX-CHINA - Zinc prices will remain stable in the remaining months of this year on the back of strong demand from China, industry insiders told Interfax at the 2007 Lead & Zinc Summit - Prices, Futures, Market & Development, held in Shanghai over the weekend.
"China will remain the largest zinc consumer in the world, and the country's strong demand for zinc will continue to support zinc prices for the remaining months of this year," Wu Xijun, a senior official with Shenzhen-listed Zhongjin Lingnan Co. Ltd., a leading zinc smelter located in Guangdong Province's city of Shaoguan, said.
"Although there is currently a slight oversupply of zinc [in global and Chinese markets], China's steel industry has recently entered the September peak consumption season, and we therefore expect zinc prices to remain stable in the coming months, with the current price of RMB 25,000 ($3,324.47) per ton acting as a support point. However, we expect to see substantial global oversupply in 2009," Wu said.
Zhao Cuiqing, deputy director of the China Nonferrous Metals Industry Association's (CNMIA) zinc and lead department commented that the global zinc market is currently driven by increased demand, rather than a raw material shortage, and China's rapid industrialization is will firmly support the demand for zinc in the future.
"In addition to consumption from the downstream steel industry, zinc is also widely used in China's hardware manufacturing sector, which consumes between 1 million and 1.2 million tons of zinc per year. For example, China's water tap manufacturing sector consumed 240,000 tons of zinc last year alone," Zhao explained.
Moreover, Zhao predicts that China's zinc production capacity will increase by as much as 500,000 tons this year and by 680,000 tons next year. There is currently 1.25 million tons of zinc smelting capacity under construction in China, with 620,000 tons in the Inner Mongolia Autonomous Region, where various projects are under construction near mines, according to her.
However, Heng Kun, an analyst from Beijing-based Anxin Securities, held a more bullish view of China's zinc consumption for this year and the next due to China's fast growing economy and low stockpile levels, and commented that China's increased investment in the transportation industry is a major factor contributing to the growth in zinc consumption this year.
Heng further commented that there was no significant zinc oversupply in the Chinese domestic market this year, and predicted that zinc prices on both the Shanghai Futures Exchange (SHFE) and the London Metal Exchange (LME) would reach highs of RMB 30,000 ($3,989.36) per ton and $3,500 per ton respectively in the remaining months of this year.
Recently, capacity growth from global zinc mines has outpaced the growth in zinc smelting capacity. This has led to imported zinc concentrate treatment charges (TCs) reaching record highs of between $370 and $380 per ton.
Since then, zinc concentrate TCs in the domestic market have increased to current levels of between RMB 8,000 ($1,063.83) per ton and RMB 9,000 ($1,196.81) per ton, due to increased domestic concentrate production. According to the CNMIA, China's fixed assets investment in the lead and zinc mining sector amounted to RMB 26.72 billion ($3.55 billion) in the first six months, up 75.6 percent from the same period last year, significantly above 57.8 percent growth in the smelting sector.
However, despite high-level TCs encouraging domestic zinc smelters to expand capacity and increase earnings, stricter government policies on pollution control and facility upgrades have limited capacity expansion plans, Zhongjin Lingnan's Wu commented.
The Chinese government policy to control growth in the zinc and lead industry, released in March this year, has so far led to the elimination of between 300,000 and 400,000 tons of zinc capacity, according to an estimate by Xu Jiancheng, president of Guizhou Xianjin Zinc Co. Ltd., a private zinc smelter located in Guizhou Province's city of Liupanshui, a major zinc producing region in China.
"More than 20 small-scale zinc plants have been shut down in my city alone this year. Moreover, the reduction in zinc capacity, caused by the shutdown of so many small smelters, has tightened supply in the domestic spot market in a way that was not previously anticipated by market players," Xu said.
The spot price of 0# zinc ingot lay between RMB 27,800 ($3,696.81) per ton and RMB 27,900 ($3,710.11) per ton in the Yangtze River Nonferrous Metals Market last Friday, noticeably higher than futures market prices.
The most active November contract closed at RMB 26,405 ($3,511.3) per ton last Friday on the SHFE, while the three-month zinc price on the LME fell to a new low for this year to $2,775 per ton last Friday, down 32.81 percent from the beginning of the year.
According to various traders at the 2007 Zinc & Lead Summit, both domestic smelters and traders have amassed substantial zinc stockpiles, which they are reluctant to sell in the market.
"At present, we're looking at tight supply in the domestic Chinese spot market. We are therefore confident of downstream consumption in the future, and contracts offered by our clients have increased recently," a Tianjin-based trader, who asked to remain anonymous, told Interfax at the summit.
Li Junchao, an analyst from Shanghai-based Xinguolian Futures Brokerage commented that domestic smelters and traders could face losses if they sell refined zinc at current market prices, as the market prices has dropped from when many of them imported zinc concentrate or purchased refined zinc from the market.
"Many smelters and traders are stockpiling zinc and hedging their bets against a fall in prices in the futures market, rather than selling refined zinc in the spot market," he added.
Li predicted that despite the downturn in LME prices exerting pressure on strong domestic zinc spot prices, zinc prices will remain at current levels until the first quarter of next year, as the lion's share of new zinc smelting capacity is not due to start full-scale production until the first quarter. However, when full-scale production does commence, domestic prices will fall dramatically.
According to the China Commodities Weekly published by Macquarie Research last week, an estimated 70,000 tons of zinc has been stockpiled in the domestic market over the past few months, including approximately 40,000 tons in bonded warehouses.
China produced 276,300 tons of refined zinc in July, and a total of 2,082,800 tons in the first seven months of this year, up 20.9 percent from the same period last year.
The nation exported 24,198 tons of refined zinc in July, up 83.69 percent from June, and 213,889 tons in the first seven months, lifting 76.4 percent year-on-year. Imports of refined zinc amounted to 16,493 in July, and 85,802 tons in the first seven months, down 55.7 percent from the same period last year.
China expected to continue to drive up commodity prices: Bank of Canada
CANADIAN PRESS
Published Thursday November 22nd, 2007
OTTAWA - A Bank of Canada report suggests Canada owes much of its hot commodities-driven economy and the surging dollar to China's insatiable demand.
And the report says China will continue to drive up commodity prices such as oil and minerals for years to come. The paper in the bank's fall review says China's economy has been expanding by an annual average of 9.7 per cent for the past quarter-century and there appears to be no end in sight.
Even so, China's impact on trade patterns since joining the World Trade Organization in 2001 and subsequent runaway demand for oil and metals has caught the world by surprise, says the paper.
"Together, these two effects help explain the recent change in the relative prices of these goods," says the paper titled "The Effect of China on Global Prices."
"For oil and metals, China's size and growth are likely to remain among the key factors driving the growth of global demand for some time."
For instance, the paper notes that international bodies consistently underestimated China's demand for oil, which increased by 28 per cent from 2002 to 2004, and have contributed to the steep rise in crude oil prices to near US$100 a barrel level today.
As well, in 2002 China accounted for about 13 per cent of world trade in metal ores. Three years later, that slice of the pie had grown to 25 per cent, with estimates it may have exceeded 30 per cent in 2006.
As a result, between 2001 and 2006, prices for metals such as aluminum, copper, nickel and steel have almost tripled.
The paper equates China's emergence and impact on the world economy to that of Japan in the 1960s, saying that exporting countries will likely react by increasing supplies of these commodities, but the adjustment will take some time.
"Hence, the relative prices of commodities can also be expected to remain somewhat elevated."
.....
"At this point...definitive empirical evidence that China is a net source of disinflation, or inflation, remains elusive," the paper concludes.
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