Pain is real

The in­ter­na­tional zinc mar­ket is volatile. Where will it end?

Enterprise - - Contents - By Andy Home

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.

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