May 16,2008

Earthquakes in China Disrupt the Supply of Nonferrous Metals

By CSC staff

The recent earthquakes with their epicenter in Wenchuan, Sichuan Province have affected the exploitation, production, and transportation of nonferrous metals in Sichuan and Yunnan Province; this will affect the supply of some nonferrous metals, especially the short term supply of zinc.

On May 13th, the first trading day after the earthquakes, nonferrous futures, including copper, aluminum, and zinc boomed in the Shanghai Futures Exchange. Zinc futures saw the biggest price hike as the price of zn0807 increased by 450 Yuan per ton, or 2.15%, to 18735 Yuan per ton. The price of Cu0807 increased by 360 Yuan per ton to 62870 Yuan per ton, and the price of al0807 increased by 100 Yuan per ton to reach 18951 Yuan per ton.

Most analysts believe the price increase was caused by the earthquakes in Sichuan and their subsequent effect on production.

However, opinions still vary on the extent the earthquakes have influenced these latest price hikes. Some analysts think that due to destruction caused by the earthquake, the trend is likely to remain the same for metal futures in the foreseeable future, with the price of zinc and aluminum futures likely to rise by about 1000 Yuan per ton.

Others suppose that the influence of the earthquakes has already been fully represented in the international metal futures market last night, and the domestic price hike is mainly a response to the international market. "Like the snowstorm at the beginning of the year, this is only a short-term factor; it will not seriously affect the market."

In 2007 the production of zinc, aluminum sheet, and copper sheet in Sichuan Province was close to 200,000 tons, 1,000,000 tons and 20,000 tons, accounting for 5.5%, 8.6%, and 0.1% to 0.2% of Chinese total respectively. Industry insiders commonly believe that zinc futures will be the most affected, followed by aluminum futures, and copper futures.

About 470,000 tons of zinc smelting capacity has been affected by the earthquake in Sichuan. This is only based on a preliminary survey of smelters. The situation in zinc mines may be even worse, but because of the disruption caused by broken roads and telecom equipments, they have lost communication with the outside world. 

"Local zinc smelters in Sichuan Province have been affected by the earthquakes in different degrees. Moreover, the halt in transportation may affect future supply," said Jiang Ning, a senior analyst with the Shanghai Nonferrous Metals Trade Association which keeps daily phone contact with upstream suppliers.
Zinc smelting capacity in Sichuan and affected neighboring provinces, such as Gansu and Shaanxi, account for about 11% of total Chinese production. "The influence on the zinc supply depends on the extent of the destruction caused by the earthquakes. It will be fine if transportation and electricity can be restored in a short time, if not, there will be real trouble," said Chen Jinhua, Deputy General Manager of a gold firm in Shanghai.

According to the latest figures of the Shanghai Futures Exchange, by May 9th, the zinc reserve of the future exchange was 70384 tons, yesterday, zinc reserves in the London Metal Exchange decreased by 700 tons to 124775 tons.

"Whether it be in Shanghai, or in the international market, there is still an abundant supply, and up to now, no external forces have come and disrupted this situation" said an analyst.


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