Tue Aug 16, 2016 | 1:14 PM EDT Zinc deficit looms, prices up, but output restarts unlikely
Zinc dross, used in the production of galvanized steel, is seen at a workshop of the Novolipetsk (NLMK) steel mill in Lipetsk, about 500 km (311 miles) southeast of the capital Moscow, January 30, 2014. Picture taken January 30, 2014.
REUTERS/ANDREY KUZMBy Pratima Desai | LONDON
(Reuters) - Zinc's sharp rally and looming market deficit has fed speculation that major producers such as Glencore may reverse output cuts, but analysts caution that is unlikely to happen soon.
Only when stocks of concentrate and metal sink to levels where higher prices can be sustained will large producers look at restarting capacity, they say.
Benchmark zinc on the London Metal Exchange has climbed nearly 60 percent from January's multi-year lows to around $2,300 a tonne, its highest since May 2015.
Many zinc mines have been shut or mothballed over the past couple of years, but prices did not really take off until this year when deficit expectations intensified with the closure of the Century mine in Australia and Lisheen in Ireland.
Glencore's decision last year to slash 500,000 tonnes of annual zinc production set the ball rolling. Its zinc output in the first half of this year fell 31 percent to 506,500 tonnes from the same period last year.
"We don't think Glencore will reactivate in response to prices," said Graham Deller, analyst at CRU. "They will wait until the concentrate market runs out of spare material."
John Meyer, analyst at SP Angel agrees: "Glencore will allow the market to keep rising until stocks fall and it can restart zinc production at sustainably higher prices".
Glencore declined to comment
Analysts estimate about 750,000 tonnes of annual zinc output outside China has been mothballed over the last two years. Of the 600,000 which could be restarted, about 400,000 belongs to Glencore, they say.
Of the remaining 200,000, analysts say the largest chunk is owned by Nyrstar, which has its mining business up for sale, and while higher zinc prices might make that process easier, the chances of restarts are low.
Nyrstar declined to comment on the possibility of restarts.
Chinese output and idled capacity is difficult to estimate, analysts say.
"Higher-cost Chinese zinc mines often restarted capacity when prices moved towards $2,300/t in the past," Bank of America Merrill Lynch analyst Michael Widmer said in a note, adding that "zinc's rally was driven by a confluence of factors."
Factors include steady global demand, estimated at around 14.5 million tonnes this year, for the metal used to galvanize steel and forecasts for market deficits, which a recent Reuters poll estimated at 221,000 tonnes this year.
Falling stocks in LME approved warehouses, which at 457,900 tonnes are down 25 percent since September, are another reason.
Key to market psychology has been the concentrate market, which has tightened to the extent that treatment charges, fees paid by miners to smelters to process raw material into metal have tumbled towards $100 a tonne from above $200 in April 2015.
"(Lower treatment charges provide) imminent headwinds for those smelters, many of which are Chinese, that purchase ore on the spot market and not through contracts," Widmer said.
Shortages of ore have meant top consumer China has had to source more metal overseas. Its imports rose more than 47.8 percent to 291,892 tonnes in the six months to June from a year ago.
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