China Zinc Smelter Fees May Drop 14% Next Year on Mine Closures

China's zinc smelters, the largest in the world, may get paid 14 percent less next year to process metal as they compete for shrinking raw material supplies.

Processing fees, also known as treatment charges, may drop to 6,000 yuan ($878) a metric ton in China from an average of 7,000 yuan this year, according to Zhang Jie, chief financial officer at Yunnan Chihong Zinc & Germanium Co., the nation's fifth-biggest zinc smelter.

The cut, the first since at least 2006, will add to pressure on earnings at Hunan Nonferrous Metals Corp., China's largest producer, and Yunnan Chihong which slumped in the first half after a 27 percent drop in zinc prices in Shanghai this year.

Zinc traded at 14,105 yuan a ton on the Shanghai Futures Exchange, down 59 percent from a record 34,745 yuan on May 10, 2007. Zinc has fallen 27 percent in Shanghai and on the London Metal Exchange this year.

Rising costs and falling metal prices forced mines to close globally, as supply outpaced demand hurt by an economic slowdown. Teck Cominco Ltd. and Xstrata Plc in July said they will close their Lennard Shelf zinc mine in Australia. AIM Resources Ltd.

Profit Declines

Hunan Nonferrous profit declined 75 percent to 74.2 million yuan in the six months ended June 30 as zinc prices dropped and snowstorms cut production. Yunnan Chihong's profit dropped 69 percent to 204.9 million yuan in the same period from a year ago.

Mining companies in China's Yunnan province, which produced about 25 percent of the country's zinc concentrate last year, are reducing output, said Yunnan Haolong Industrial Group Co.

Yunnan Haolong, which makes as much as 100,000 tons of zinc and lead concentrate in metal content a year, halted production of low-grade ore and cut back on high-grade ore because of falling prices, said Vice President Suo Fang by phone from Kunming, Yunnan province.

It cut fees to smelters to 7,300 yuan a ton from more than 8,000 yuan a ton, Suo said.

Production Curbs

Mining companies in Hunan province, China's third-largest zinc concentrate producer, also stopped low-grade output because of losses, said Yuan Zhigan, assistant to board director of Chenzhou Xiangheng Mining Ltd.

Some producers have switched to tin, Yuan said. Chenzhou Xiangheng Mining owns five small lead and zinc mines in Hunan.

Chinese smelters buy 70 percent of zinc concentrates domestically and the remainder from global miners such as Teck Cominco, the world's second-largest producer.

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