"With things turning this bad, every smelter is thinking only of itself. They can no longer March in step with one another," said a senior trader. "Secretly, they've started to offer discounts to defend themselves."

Traders say domestic premiums for zinc, particularly those for Prime Western (PW) grade material, have started to ease as some smelters desperately attempt to limit sales falls in Japan's worst recession since World War Two.

"They've exported surplus metals. But it's more profitable to sell at home. Some are now selling the metal to users who in the past had been supplied by others," said another trader.

"It's interesting to watch how the war among the smelters will develop. It's already begun," the trader added.

To prevent falls in domestic premiums, Japanese smelters have shippedsurplus metal abroad, with zinc exports jumping to 8,882 tonnes in August, up from 4,622 tonnes in July. Exports to the United States reached 4,000 tonnes in August.

Yet traders say an expected fall in fiscal 1998/99 domestic demand towards 630,000 tonnes demand, compared with 740,000 tonnes last year, requires more than cuts in the imports of low-priced foreign metal and efforts to unload the surplus abroad.

"The domestic market is shrinking. They (smelters) now have to fight for their own survival," said another trader. "The Prime Western business is the first target as it's difficult to get the right PW metal from abroad."

Now the smelters also fear the weakening of the dollar against the yen, which slashes their revenue from dollar-denominated treatment charges, traders said.

The dollar's strength until recently gave them breathing space to cope with the sharp downturn in international zinc prices and slumping demand at home and in neighbouring Asian countries.

Traders also said few wereplanning zinc imports under the once-a-year non-tariff system, known as the Generalised System of Preference (GSP), after purchasing 66,572 tonnes under the scheme this year.

The GSP scheme, grants a tariff exemption to imports from developing country submitted for customs clearance at the beginning of the fiscal year in April.

In the past, some Japanese smelters struck GSP deals as early as August with Chinese suppliers at high premiums to deter trading houses and end-users from importing large quantities of low-priced foreign metal.

"There are some traders, who still have GSP metal, though they usually have sold all of it by the summer," said the first trader. "The GSP savings of 5,040 yen (per tonne) in tariffs has been spent on paying interests or warehouse costs."

Traders also say most foreign suppliers, including China, have shown little interest in selling zinc for GSP imports after falls in zinc prices on the London Metal Exchange (LME), which took the metal's prices to four-year lows onFriday.

"(International) zinc prices are too low. I don't expect much exports from China for a while," said the second trader. "Last week, I heard they wanted $990 FOB China. This means premiums of more than $80 (CIF Japan). It doesn't pay at all."

The second trader added: "If you simply calculate from production costs, a premium of even $50 won't be enough. Unless China depreciates the yuan, it's better for the Chinese to sell at home. Domestic prices are still above $1,000."