The plan by China's top zinc smelters to cut output may not be enough to bring sustained long-term relief to the beleaguered sector as galvanizing demand from the steel industry weakens and inventories swell, four industry sources said on Friday.
On Thursday, major smelters in the world's top zinc producer proposed reducing output by 10 percent to shore up prices, which are on track for their worst quarterly performance since the third quarter of 2015.
The decision highlights the growing financial pain in the sector, but the move only gave a short-lived boost to prices for the metal used to galvanize steel, which protects it from rusting.
Shanghai zinc futures rose 1.5 percent on the news on Thursday, but managed to add only another 0.3 percent on Friday. Ballooning stockpiles of refined metal and poor order books from galvanizers explains the lukewarm market reaction.
An executive at a major Chinese smelter reckons the impact of the cuts will be minimal.
"Galvanized pipe firms... are currently subject to strict environmental protection policies," he said. He declined to be named. "Production suspensions and reductions are severe."
The coordinated move comes after Chinese zinc production dropped by 5 percent in May from a month earlier, although it was up 1.6 percent year-on-year in the first five months of 2018, data from the National Bureau of Statistics shows.
Cutting 10 percent of output would equate to about 400,000 tons on an annualized basis, Helen Lau, an analyst at Argonaut Securities, wrote in a note on Friday.
This would "greatly mitigate the risks of oversupply in our view if it is followed through" for the rest of the year and should help stabilize prices, she added.
But demand for galvanizing is particularly weak, she cautioned. China's galvanized steel production decreased by 3.3 percent in May, whereas overall steel production grew by 11 percent during that period, she said.
