ust one global trading house may determine whether 2016’s best-performing commodity keeps rallying in the new year.
Glencore PLC has become the big focus of zinc traders and analysts by sitting on 500,000 tons of annual production
it shut as the commodity markets busted back in 2015. Now zinc is leading the broad commodity rebound — up 60% and the best performer in the Bloomberg Commodity Index in 2016 – making analysts question a restart from
Glencore.
Glencore’s shut-in supply accounts for about 4% of world production and may make up the entire shortfall in the zinc market these days. Analysts put zinc’s supply shortage less than 400,000 tons.
“Glencore’s the crux of the market this year really,” said David Wilson, director of metals research and strategy at
Citigroup in London. “They might not bring it back quickly – and, really, they might not bring it back at all this year.”
A Glencore spokesman declined comment.
The Swiss commodities giant both mines and trades zinc and other minerals, a business model designed to benefit from insider knowledge about supply and demand to boost profits from trading, common in commodity markets. In theory the trading business should be able to make money at both high and low prices, but high prices lead to larger margins, higher premiums charged on trading and shipping minerals, and higher prices from selling zinc traders have stocked away in storage.
There are also signs that more than a year since
Glencore and other miners made massive cutbacks, the market is still getting tighter. Consumers in big developing markets such as India and China
are demanding higher-quality cars that use materials made with zinc. Smelters have also cut their charges on zinc by about 80%, common when limited supply makes bidding more competitive, Mr. Wilson said.
“I don’t think (Glencore) would want to do anything to undermine the tightening narrative of the market,” he added.
Analysts at Morgan Stanley, which called themselves “big believers” that Glencore would restart production this year, had said it wouldn’t happen until the middle of the year. Glencore executives likely want the price of zinc to climb above $3,000 a ton, Mr. Wilson said, adding prices are likely to peak around there in the fourth quarter.
The London Metal Exchange’s three-month zinc contract recently traded down 1.8% at $2,528.50 a metric ton. It
has followed other metals lower in recent weeks, down 13% from its peak of $2,911 a metric ton Nov. 28, when it hit a nine-year high.
But the supply shortages could be enough to restart the rally, even if Glencore restarts production, said Michael Widmer, metals analyst at Bank of America Merrill Lynch in London. There are no blue-chip companies that put a big focus on zinc, limiting investment in the sector, he said. That is causing supply declines to outpace additions and may grow the shortages beyond what Glencore can fill.
“You had basically no supply growth,” Mr. Widmer said. “There’s no quick solution.”
He forecast prices to rebound to a peak of $2,950 a metric ton in the second quarter.
By
Tim Puko
