December 19, 2008 / 11:03 AM / 11 years ago

UPDATE 2-China launches metal stock build with first indium buy

(Recast with more metals)

By Polly Yam

HONG KONG, Dec 19 (Reuters) - China launched its drive to dramatically expand government metal stockpiles this week, buying indium for the first time ever and starting negotiations to add to zinc and aluminium inventories, sources said on Friday.

The campaign may gather pace in the coming days as the State Reserves Bureau, which is responsible for buying and managing the country’s metals reserves, aims to soak up domestic surpluses and keep Chinese smelters operating as a sharp economic slowdown quashes demand.

The SRB bought 30 tonnes of indium — a minor metal used in making LCD screens — from a large Chinese smelter on Wednesday, a trade source familiar with the deal said on Friday. China is the world’s top producer of indium, a by-product of zinc output.

Smelter officials said the SRB is expected to start buying zinc and aluminium soon from Chinese smelters and the domestic spot market, given prices were touching the bottom. That spurred growing speculation that copper could be next.

“The SRB has informed smelters of the (zinc) buying plan,” an official at a large zinc smelter said. “We understand that the SRB plans to buy 300,000 tonnes.”

The indium deal, a first for the SRB, represents the equivalent of about 6 percent of the 510 tonnes of global indium output last year, figures from the U.S. Geological Survey showed. Spot indium in Shanghai traded at about 2,000 yuan a kg, or about 2 million yuan per tonne on Friday.

The SRB is expected to buy more indium from smelters or the domestic spot market in coming weeks, the source said.

Top zinc smelters Zhuzhou Smelter (600961.SS) and Huludao Zinc 000751.SZ are also the two biggest indium producers in the country.

Zinc is up next, potentially bringing relief to smelters who have failed to shore up prices since they began cutting production since October. But demand has fallen even quicker, causing a commercial inventories to rise as high as 300,000 tonnes, nearly one month’s production in the world’s top producer.

“The plan has been kicked off,” the source said. “Smelters are entering into a stage of signing contracts (with the SRB).”

The National Development and Reform Commission, which controls the SRB, is believed to have agreed to buy primary aluminium from smelters in principle, industry sources said.

The state planner has requested large aluminium smelters to enlarge their production cuts to help trim the surplus, in return the SRB could buy between 1 and 2 million tonnes of metal in coming months, a smelter official said.

About 1.4 million tonnes of primary aluminium are estimated to be sitting at private and public warehouses and smelters’ yards, smelter officials and traders have said.

The stocks may rise to 2 million tonnes in February, given the weaker demand in January as many end-users close or slow production during the Chinese New Year, which falls on Jan 26.

Copper may be the next metal the SRB would buy, given the surplus is smaller than zinc and aluminium, while a copper smelter source said such purchase, if proceeded, could reach at least 700,000 tonnes. He added 400,000 tonnes of the total might come from Jiangxi Copper (0358.HK)(600362.SS).

Pan Qifang, Jiangxi Copper’s spokesman, said the largest copper producer in China had not received a written request for the state buying, but encouraged the central government to buy copper as the country was short of the resource.

“We believe now is the good time to buy copper,” Pan told Reuters on Friday. “The buying should come from imports.”

A director at the trade department of Yunnan Tin (000960.SZ), the country’s top tin producer, said the firm was working on submitting information to the central government’s plan to buy metals reserves from smelters. (Editing by Jonathan Leff)

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