Pain is real
The international zinc market is volatile. Where will it end?
Will China´s zinc smelters cut production? If they make good on a proposal to take a collective 10 percent hit, it would remove at least 400,000 tonnes of metal from the market on an annualised basis.
The news has halted the slide in zinc prices, both in London and Shanghai, though it may have been little more than narrative wrapping for an overdue correction.
The London Metal Exchange (LME) three-month zinc price is this morning trading at $2,875 a tonne, still close to 10-month low of $2,815 and a long way from February´s peak of $3,595.50.That tells you the market isn´t that impressed either.
As is often the case with such pronouncements from China´s producer associations, there is no tangible detail on actual implementation. Perhaps more significant than the future promise is that China´s zinc smelters are sufficiently worried about the market to have held June´s meeting in the first place.
Zinc´s price narrative may have flipped from one of raw materials shortfall to one of coming surplus, but the reality for the world´s largest producer of refined metal remains one of a stressed supply chain.
Chinese zinc price has retreated in tandem with the LME price from those February highs. The Shanghai Futures Exchange (ShFE) zinc contract structure remains tight, reflecting low registered stocks, down another 14,387 tonnes to 81,309 tonnes. But the outright price has touched its own 10-month low of 22,380 yuan a tonne. And exchange stocks are but the tip of a larger, submerged port inventory, estimated by Shanghai Metal Market (SMM) to total about 340,000 tonnes, including 185,000 tonnes in bonded warehouses.
Meanwhile, order books from the galvanizing sector, a key user of zinc, are low as plants close for environmental inspections. The overall impression is of a mainland market that is well supplied with refined metal. But while the zinc price slides, the price of raw materials remains stubbornly high.
The result is a squeeze on zinc smelter margins.
Smelters´ primary source of income is the fees received for converting mine concentrates into refined metal, the so-called treatment charge. This year´s benchmark treatment charge was set at $147 a tonne, the lowest headline settlement in more than a decade. In China, however, spot treatment charges are lower still, assessed by SMM at only $20-30 a tonne for imported material.
With China´s detailed metals trade figures for April and May still pending, it´s impossible to say how zinc concentrate imports are running. But it´s clearly not enough to shift spot treatment charges towards more profitable territory for many of China´s smelters.
While futures markets are pricing in an expected surge in mine supply, these low smelter treatment charges signal that the raw materials market remains tight. The International Lead and Zinc Study Group (ILZSG) forecast in April that world zinc mine production would rise by 5.1 percent this year.
However, there was no growth at all in the first four months of the year, according to the ILZSG´s latest monthly update. Global output fell by 0.1 percent for January-April relative to last year.
Production outside of China rose by only 0.8 percent in a sharp slowdown from last year´s 6.3 percent. New supply may be coming, but it will take time. Take the example of New Century Resources, which is resuscitating the giant Century mine in Australia. Just as Century´s closure in 2015 heralded the start of zinc´s bull run, so its return has become totemic
of the building supply response to higher prices. But New Century, which is pioneering technology designed to extract minerals from tailing dumps, will ramp up only slowly.
It is targeting output of 4,000 tonnes in the third quarter and 30,000 tonnes in the fourth. Full annual capacity of 260,000 tonnes is evidently still some way off, with the time line dependent on how smoothly commissioning goes. Whether new mines or rehabilitated mines, none are switched on to full production overnight, which is why this year´s benchmark treatment charge was still down on last year´s $172 a tonne. Chinese smelters are receiving even less.
The motivation for Chinese zinc smelters to take a production cut is clear. They are caught between a futures price that is sinking partly on the weight of an expected coming surplus and the reality of a tight concentrates market.
Whether they will actually implement coordinated production cuts is another matter entirely. Even the two smelters seemed uncertain whether the reductions would actually materialise.
Realistically, individual Chinese producers will make their own decisions. Many already have, rescheduling maintenance downtime or running at lower capacity. China´s state metals research house Antaike estimates that national refined zinc production rose by 2.7 percent in the January-April period.
It noted that growth was being constrained by smelter downtime. “Zinc smelters in Yunnan, Sichuan, Guangxi and Anhui restored normal operating rates after overhauls, but other plants started maintenance,” it said.
Moreover, as with other industrial metals, Chinese zinc production is increasingly prone to unexpected disruption from environmental checks as Beijing keeps up its war on smog. Among the smelter representatives attending meeting in Shaanxi -- about 70 percent of the country´s producers -- there will be many who can already demonstrate that their production has fallen or is running slower than originally planned.
A formal production cut announcement is simply a way of giftwrapping the current reality for the futures markets. Right now, the news has paused what was turning into a rout, the zinc price tumbling 20 percent from its February highs. The market is, understandably, a little unsure what to make of the announcement. But it should heed the underlying message of smelter pain. Raw materials tightness was building a long time before it erupted into the refined zinc trading arena. And it hasn´t gone away yet, even if the zinc price says it has.