Article written by Glencore ack to Infomine. Appeared three...

Article written by Glencore ack to Infomine. Appeared three weeks ago
Zinc and Lead

The widely anticipated zinc mining output reduction materialised and resulted in significantly tighter physical market conditions, particularly for zinc concentrate. Confirmation of decreasing supply, in combination with better than anticipated demand conditions driven by the recovery of the Chinese real estate and global automotive market, has resulted in destocking of both zinc concentrates and metal during the year and a higher corresponding LME price.
The widely anticipated zinc mining output reduction materialised and resulted in significantly tighter physical market conditions, particularly for zinc concentrate
2016 Chinese zinc mine production was similar to 2015, despite the incentive of a higher SHFE zinc metal price, and a reduction in zinc mine production from the rest of the world (“ROW”) of around 900kmtu (10.8%). Consequently, realised Benchmark TCs reduced by $32/dmt ($243 to $211) while average spot TCs were down by $99/dmt ($201 to $102).
The tightness in zinc concentrates is yet to impact Chinese zinc metal production, even though Chinese concentrate imports were down by 640kmtu and domestic mine production was flat year-over-year. Chinese smelters reported similar production as in 2015, which is attributed to destocking of concentrates stock built up in prior years. ROW zinc metal production was down by 244kmtu compared to prior year.
ROW zinc metal continues to be shipped to China, following the trend of the last few years. Metal imports into China were stable year on year, causing further inventory drawdowns from LME exchanges (stocks down from 463kt to 428kt), while SHFE (199kt to 153kt) and Shanghai Metal Market stocks have also been drawn to cover the needs of the Chinese physical market. Published non-exchange stocks in China have also reduced by a further 50-80kt. Real estate and infrastructure end markets in China are performing better than expected, supported by Chinese government actions in H1 2016, while the automotive market continues to show strong growth both in China and ROW.
The lead supply side trend is similar, given that it is generally a by-product of zinc. Lead benchmark TCs were down by $22.50/dmt ($170 versus $192.50), while spot was down by $60/dmt ($117 versus $177) compared to 2015 averages. Chinese lead concentrates imports were also down by 24% year over year.
Going forward, we expect tight zinc concentrates supply to translate into lower metal production in 2017, which should cause further inventory drawdowns and provide support to the metal price.