Reuters reported that China's buying of refined zinc in the international market may be restricted by lukewarm domestic demand and high stocks for the current quarter although the arbitrage window opened wider last week. Industry sources said that near 1.4 million tonnes of refined zinc may be stored in public and private warehouses in China currently, smaller than up to 1.5 million tonnes in June due to 7.2% fall in production in July. The stocks, including Shanghai Futures Exchange's near record of 400,450 tonnes are equivalent to more than 3 months of China's monthly zinc production. China is the world's largest producer and consumer of zinc. Like copper, the arbitrage window between the three month London Metal Exchange zinc and Shanghai prices opened last week and reached a multi month high of near CNY 900 per tonne. A manager at a large trading firm in Shanghai said that the arbitrage is now profitable based on the LME and Shanghai prices. But similar margins can be achieved between the front-month and forward contracts in Shanghai plus domestic demand is not good which produces zinc in China and imports the metal. He was referring to margins achieved from buying the front month and selling the third-month or later months in Shanghai. Traders said that unlike copper, Chinese importers had not increased booking of spot refined zinc in the last two weeks as high stocks and weak demand made importers cautious about booking more spot shipments. Mr Li You an analyst at Minmetals Futures said that "Zinc is very sluggish compared with copper. The volume is very small. Importers were not keen to book spot zinc now because of the seasonal weak demand in the summer.” Mr Li You said that high stocks were making merchants cautious about booking more spot imports. A trading manager at a large zinc smelter said investors and merchants were unlikely to increase imports unless the arbitrage widened to about CNY 1,000 given buyers typically paid handling charges for local ports and premiums to sellers. Traders said that spot zinc to China was being offered at premiums of USD 50 per tonne to USD 80 per tonne over the cash LME zinc prices. Port handling fees range about CNY 150 per tonne to CNY 250 per tonne. China imported 25,317 tonnes of refined zinc in June up from 25,101 tonnes in May. The July data will be released later in the month. It produced 425,000 tonnes of refined zinc in July down from 458,000 tonnes in June. The smelter trading manager said that zinc demand from diecasting plants had fallen from June and now many plants were operating below their capacities. I recently went to Hebei province and visited a few big diecasters. Their operation rates were about 50%. Many small plants in Zhejiang province that made parts for locks had closed due to reduced orders and tight credits which reduced plants' cash to buy zinc.

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