COMMENT: What is holding the zinc market back?
Of all the base metals, zinc has the most solid set of fundamentals. Raw materials are becoming scarce, some smelting capacity has come off and demand is still looking good.
Given this relatively positive picture, zinc prices should be shifting upwards quickly, but they aren’t.
Leaving fund games and financing aside for a moment, at a fundamental level, there are two possible reasons for this: either the concentrate supply story isn’t all it’s built up to be, or there’s a vast amount of refined metal still available.
It’s the latter.
Zinc concentrate supplies are very tight, with most production spoken for, and those producers with material to sell having very occasional tenders. This means the only sources of concentrate for the time being are traders.
This squeeze can be seen in treatment charges (TCs) – the fees mining companies pay smelters to turn their concentrates into finished metal – moving lower and lower, and thus in favour of the miners.
In March, Glencore set TCs at
$188 per tonne, with a corresponding basis price of $1,500, but prices are now trading in the mid-$1,800s while spot TCs are $120-140 in Europe, indicating that the tightness in the concentrates market has well and truly bitten.
So, then it has to be refined metal stocks weighing on prices to keep them where they are. If you need metal now, it is not hard to get hold of it: there are about 400,000 tonnes of SHG zinc in London Metal Exchange sheds, and estimates vary of how much is sitting off-exchange, but it could be in the region of 1 million tonnes, and even up to 1.5 million tonnes, some market participants have suggested.
That equates to an availability of about a year’s worth of global zinc usage.
But, logically, if TCs continue to fall, smelters will eventually have to curb their production in order to preserve their margins as they are paying the miners a greater proportion of the final zinc price, and it is at this point that the zinc story will become very bullish.
There is little extra appreciable capacity coming on for either concentrates or metal within the next year – notwithstanding the possibility of Glencore’s 500,000-tonne shutdown coming back online, which some see occurring at prices of about $2,000-2,200 per tonne – and this should also cause banks and investors to come flooding back, lending more support to prices.
For the time being then, zinc prices will still be moved by copper, oil, stocks, Fed statements and whichever side of bed the funds got out of in the morning, but with the concentrates deficit firmly taking effect and the prospect of the refined supply being eaten away, by the time we reach the end of the year the galvanizing metal should be firmly back in the hands of the bulls.
cheers
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