As the dreadful humanitarian toll of the Covid-19 epidemic in China grows, the direct and indirect impact on the Chinese zinc and lead industries from efforts to control the spread of the disease is starting to be seen.
The extended Lunar New Year holiday has ended, but return to work by millions of migrants has been slowed to a trickle. A combination of transport restrictions, quarantine periods, staffing shortages and a government-mandated staged return to work means that the normal post-holiday bounce back in economic activity will not happen. And it seems increasingly likely that February will be an economic write-off for China.
50% of Chinese mines take extended shutdown The impact of the epidemic on Chinese mine supply is varied. We estimate that as much as 50% of the industry has been forced to take an extended shutdown. The impact of this will be exacerbated as mines often employ significant numbers of sub-contractors, with the coastal provinces of Jiangsu and Zhejiang being traditional suppliers of trained miners and plant operators for operations all over China. As a consequence, the 14-day quarantine period for workers crossing provincial borders will intensify the impact of this extended holiday shutdown.
Some mines considering postponing restarts until March All mines in Inner Mongolia’s Dongshengmiao region are understood to be closed. These operations produced 90kt in 2019. In Hunan Province, most operations are still closed although some white-collar workers returned to work at mines on February 10. Hunan produced 414kt of zinc in concentrate in 2019 and prior to the epidemic was forecast to produce 521kt in 2020. It is unlikely that mine restarts will commence in Hunan before February 20 with some mines now considering postponing restarts until March.
Assuming the bulk of China’s zinc-lead mines begin the process of restarting production over the next week or so, the shortfall in output and supply of raw material can be offset by a drawdown of concentrate stocks at Chinese smelters, which typically carry enough concentrate for around 20-30 days of production. However, if the restart is further delayed, we would expect that smelters will be forced to cut output when concentrate inventories become depleted.
Zinc smelters are starting to run out of acid storage capacity A more pressing issue than concentrate supplies for a number of smelters is acid storage. Zinc smelters typically produce 1.8t of sulphuric acid for every tonne of refined zinc. Some is used as part of the production process, but the bulk of the acid must be disposed of by sending it to the chemical and fertilizer industry. Smelters normally have limited acid storage capacity. Those outside of China tend to rely on regular rail and sometimes barge/ship to transport acid to customers but most Chinese smelters rely on trucks for transport. As a result, they are acutely exposed to labour shortages and movement restrictions.
Proximity to market a major factor Based on data from our Zinc Smelter Cost Service, we estimate that the typical acid storage capacity of Chinese zinc smelters is just under 20 days of normal production. But this can be as little as five days or as much as 30-days at certain smelters where proximity to market is a major factor.
The problems with acid disposal together with labour shortages and issues with supplies of other consumables are already starting to have an effect.
- Xin Zhuye (270kt/a) Hunan has cut production by 11%
- Taifeng (75kt/a) Hunan closed since January 22, plans to restart production in March
- Xuanhua (60kt/a) Hunan closed since January 22
- Bayannaoer (210kt/a) Inner-Mongolia has cut production by 50%
- Mian Xian Bayi (320kt/a) Shaanxi has cut production by 32%
- Shangluo (220kt/a) Shaanxi has cut production by 22%
- Jiyuan (Yuguang) (260kt/a) Henan has cut production by 50%
- Lanping (120kt/a) Yunnan closed since January 21, plans to restart production in May
- Xiangyun Chemical (150kt/a) Yunnan has cut production by 50%
- Hongda (100kt/a) Sichuan closed February 15 plans to restart March 10
- Sihuan (110kt/a) Sichuan has cut production by 32%
The extent of the cutbacks at some of the above smelters and others will be the result of smelters bringing forward planned maintenance, and so this month’s shortfall in output will be recoverable later in the year. However, the longer the disruption to transport and the Chinese economy as a whole lasts, the greater the likelihood of significant cuts in refined production.
Primary lead primary lead smelters face a similar predicament to zinc smelters with constraints on acid storage and, with time, constraints on concentrate and scrap battery raw materials all set to begin to constrain production.
Secondary Lead With so much of China now immobilised, there are severe limitations on the movement of scrap batteries – the main feedstock for lead recyclers – from collection through to supplying smelters. Without scrap batteries, secondary lead smelters will need to suspend operations. Without an adequate supply of refined lead, already a potential issue due to transport restrictions, battery manufacture will be brought to a halt. Chinese refined lead stocks held on the Shanghai Futures Exchange have already dropped by over one-third since the Covid-19 outbreak came to global attention at the start of this year, as consumers scramble for material.
The closure of retail outlets in many parts of China means that February sales figures will be dire. Double-digit declines are likely, particularly for durable goods such as cars and white-goods, where consumers prefer to visit ‘bricks-and-mortar’ physical shops rather than make online purchases. Online sales may be the mainstay of small electronic goods such as smartphones but even online sales are likely to struggle in the face of a shortage of delivery staff.
Automotive sales collapse Bricks and mortar sales are particularly important for the auto sector with China’s Automobile Dealers Association reporting only 20% of 2895 dealers across China had reopened as of February 14. There is likely to be a near collapse in the February sales figures. This will place further pressure on the sector, which is struggling with the lock-down in Hubei – one of China’s key automotive components producing regions. Transport disruptions mean that the return to normal auto production rates will be slow. Plants owned by Honda, GM, Nissan and the PSA group in Hubei will remain closed until further notice. While the Volkswagen-SAIC joint venture said yesterday (February 17) that its eight plants across China will remain closed until February 24 because of labour and parts shortages.
The latest assessment from China’s Association of Automobile Manufacturers (CAAM) shows that of the 183 automotive production centres it tracks only 59 have resumed production as of February 12.
With CAAM estimating that the epidemic will disrupt the production of over 1 million vehicles, zinc demand from China’s continuous galvanizers, tyre makers and to a lesser extent die-casters will also be disrupted. Assuming the epidemic dissipates promptly, the loss of sales of durable goods in February and March is likely to lead to a sharp pick up in demand in subsequent months.
Cashflow squeeze could blunt bounce-back However, there is a risk that a quick recovery of sales in the wake of the crisis might not happen if the disruption results in a sustained squeeze on cash flow for China’s small- and medium-sized (SME) businesses. The Chinese government has ordered companies to continue to pay workers even if they cannot return to work or must be quarantined. There is a risk that cash-strapped SMEs will be unable to pay their workers. In this case, the damage to disposable incomes would result in demand destruction rather than delays to the purchase of goods.
Impact of house sales collapse could be felt for months Another sector that is likely to suffer from a squeeze on cash flow is real estate. Developers have been struggling for much of the past three years with constrained access to credit as the government limited the flow of loans to the sector. Therefore, developers have become more reliant on sales for finance, so much so that in the months before the outbreak many have been offering significant discounts on house prices in a bid to keep turnover up.
With house sales effectively coming to a stop in many cities because of the crisis, there is a real danger that developers will have to put building on hold until sales and cash flows recover. As a result, the sharp recovery in housing completions seen in the final months of 2019 may well come to a stop, which in turn will hit demand for white goods and, ultimately, zinc.
In addition to end-uses, zinc’s first-use has also been severely hit by the crisis. Most galvanizers and die-casters in Tianjin, Guangdong, Hunan and Fujian are currently idled and unlikely to begin the process of restarting until February 17.
Lead demand There has been speculation that Chinese commuters will turn to travelling alone by car to avoid risk of infection on crowded public transport in close proximity to other people. The reality is that, in the majority of large Chinese cities, both new and used private cars cannot be purchased without a permit for a licence plate number. This in itself is a protracted and expensive business, involving either, or both, the offer of sealed bids or a lottery system. This permitting process, by its nature, severely curbs the possibility of any sudden uptick in car buying.
It is possible, however, that ebikes might profit from this situation as they also offer commuters the opportunity to travel alone. Since 2018, ebikes have been required to be licensed. But this regulation remains poorly enforced and is not really a serious impediment to owning and using an ebike on Chinese roads. Sales of new ebikes could spike which, in the short term, would mostly be existing stock held by distributors and wholesalers. Lead battery-powered ebikes would be the main beneficiary over lithium-ion as they are cheaper and still represent about 85% of new sales.
Existing ebikes could also enjoy a short-term increase in utilisation which, in turn, would increase the demand for replacement lead batteries. This situation naturally sounds positive for lead demand but depends on the availability of batteries, the refined lead to make these batteries, and the raw materials for producing the metal.
This constraint on Chinese lead battery production will also hit new car production and the replacement battery market. The effect from this on vehicle production will be lost amongst the disruption caused by the likely shortfalls in the supply of a variety of components to the automotive industry. Equally, if the existing vehicle fleet is being used less during this crisis period, then the resulting demand for replacement batteries will also fall.
Supply Zinc smelter production cuts will not only affect the zinc market in China but will have a knock-on effect in the rest of the world, as they cut China’s appetite for imported concentrates. This will put the rest of world’s concentrate market further into surplus and put additional upward pressure on zinc treatment charges. Our discussions at the International Zinc Association conference in Arizona this week point to spot TCs now being some $10/t higher at around $320/t than they were in January. For less desirable quality concentrates they may be as much as $400/t of concentrate.
For lead, reduced primary production will reduce the need for imported concentrate pushing TCs upwards. However, should the situation return to normal, the slow refilling of the scrap battery supply chain within China may incentivise China’s primary smelters to try and take advantage of a slow ramp-up in secondary lead production by buying imported concentrate potentially pushing treatment charges lower.
Demand Although the number of cases beyond China’s borders is thankfully limited, the influence on global “just in time” supply chains is spreading to manufacturers outside China. A shortage of Chinese-produced components has the potential to undermine the recovery in the global manufacturing sector that, was only just getting under way in the wake of the de-escalation of the US-China trade war.
The impact of the virus is already being felt keenly by the global automotive sector, with Hyundai being forced to close factories in South Korea, as have other manufacturers elsewhere in Asia. In addition, Fiat Chrysler announced that one of its European plants might have to close due to shortage of critical parts. With shipping times of 6-8 weeks from China to Europe, the impact of the coronavirus may not begin to be truly felt until March/April by European and US users of Chinese made components.
Demand postponed or destroyed?
Although the extended New Year holidays officially ended on February 10, the return to work has been slow, and it seems increasingly likely that February will prove to be an economic write-off for China. Although the authorities are moving to provide support to the economy through interest rate cuts, proposed tax breaks and other measures, these will have minimal impact on an economy that has effectively been put on hold by the efforts to contain the spread of the virus.
The longer the lock down is maintained, the greater the probability of lasting economic damage to households and businesses. With the result that rather than demand being postponed it will be permanently destroyed. In such a situation the critical unknown will be whether China’s zinc and lead producers will be willing to return production to pre-crisis levels despite potentially weaker demand or whether the likely cashflow squeeze on consumers will be transmitted through the zinc and lead value chain, constraining the recovery in output.
Compiled by: Wood Mackenzie Team