(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, Oct 13 It's been a brutal couple of days
for the zinc price.
London Metal Exchange (LME) three-month metal
slumped by $100 per tonne to $2,250 on Tuesday and the sell-off
has extended to $2,210 today.
The five-year high of $2,418 achieved at the start of this
month is starting to look a long way off, the slide coinciding
with news of producers planning to increase output of mined
Given that zinc's stellar run this year has been predicated
on a tightness in raw material supply, does this amount to a
rewrite of the galvanising metal's bull narrative?
Or is it nothing more than a technical rewind of
Tuesday's price rout took place the day after two apparently
bearish bits of news hit the wires.
The first came from Abraham Chahuan, general manager of the
Antamina mine in Peru. He told a news conference that the mine
will likely double its zinc output to between 340,000 and
360,000 tonnes next year.
The second came from Vedanta Resources, which said
that mined output at its Hindustan Zinc subsidiary had jumped 51
percent in the third quarter relative to the second with
production over the next half-year expected to be "significantly
It's precisely the sort of news that would appear to
undermine the zinc bull narrative of a shortfall in mined metal.
The only thing is that neither is really "news".
Antamina is an unusual mine insofar as it is both a big
copper and zinc producer with output of both prone to
significant fluctuation depending on which part of the ore body
is being exploited.
And the phasing of mining into a zinc-rich part of the
deposit had already been flagged by one of the joint-venture
Canada's Teck, which holds a 22.5-percent stake,
provided a three-year production forecast in its Q4 2015 report.
"Zinc production is expected to increase significantly as
the mine enters a phase with high zinc grades and a higher
proportion of copper-zinc ore processed, with our share of zinc
production during 2017 to 2019 expected to average more than
80,000 tonnes per year."
Mine sequencing is also the key to understanding Hindustan
Zinc's apparent jump in production.
Second-quarter production was depressed by a high
waste-to-metal excavation ratio in the open pit part of the
Rampura Agucha mine. The sequencing changed in the third
quarter, all part of what Sunil Duggal, Hindustan Zinc's chief
executive, described on the Q2 analysts' call as the normal
"feast and famine cycles" associated with any open pit mine as
it gets deeper.
And third-quarter integrated zinc metal production was still
30 percent lower than in the same period last year at 149,000
As for increased forecasts for the next six months, this is
all part and parcel of the transitioning of Rampura Agucha to
underground operations and "as per the mine plan", according to
If anything, production risks may be skewed to the downside
given the complexity involved in any big mine going underground.
Graphic on LME zinc positioning:
Graphic on LME zinc technicals:
Higher production at both Antamina and Hindustan Zinc will
come as no surprise to zinc analysts.
So why did the market take fright on Tuesday?
In truth, such was the rate of advance in zinc prices that
the "news" may simply have been the trigger for what was always
on the cards technically.
The LME's Commitment of Traders Report has shown net money
manager positioning growing from short in the fourth quarter of
last year to 80,472-lot long as of last Friday.
Interestingly, it had already eased from a high of 84,454
lots earlier last week, suggesting some speculative froth was
already being blown off.
And a lot more was blown away on Tuesday thanks to the LME
three-month price falling through a particularly technically
sensitive area either side of $2,300.
Not only a "big number" level, it was reinforced by no less
than three moving averages, the 20-day, the 30-day and the
50-day. The 10-day had already been broken at a higher level.
It's the sort of chart cocktail that triggers stop-loss sell
orders, which then feed on their own momentum.
Indeed, chart technicians, such as LME broker Marex
Spectron, were warning that a further decline to the
$2,225-2,235 area was to be expected.
However, Marex noted in its Thursday daily report that "a
strong bid sits beneath the market for now at least".
"There are different rules to trading zinc and don't expect
that to change just yet," it added.
In other words, there is still plenty of money chasing the
zinc bull story, not least Goldman Sachs, which issued a note
this morning, recommending a short-copper, long-zinc relative
play based on "supply divergence".
The bank's analysts expect copper to continue to struggle
against oversupply and zinc to be buoyed by undersupply.
THE GORILLA IN THE ROOM
So the bull narrative seems intact for now.
But one bit of real news should make the market wary.
That was Belgian producer Nyrstar's announcement on
Sep. 27 that it is reactivating its Middle Tennessee mines.
These were put on care and maintenance at the worst of the
zinc price trough in December last year but "given the current
strength in zinc prices and Nyrstar's expectation that these
prices are sustainable, it is now time to restart the three
mines and processing plant".
Now, these mines only generate around 50,000 tonnes per year
of contained zinc and the restart process is going to be lengthy
with full output only expected in November next year.
But they do highlight the 500,000-tonne gorilla in the room,
namely the mine capacity that was mothballed by Glencore
at the end of last year.
The suspension of around 4 percent of global mine supply
acted, and continues to act, as a powerful accelerator of a
natural tightening of the zinc supply chain.
Even Goldman warns that one "main downside risk to the (long
zinc, short copper) trade in our view would be news of imminent
Glencore zinc restarts".
Glencore has so far held its fire. How long it continues to
do so remains the key to whether the zinc bull story needs to be
rewritten rather than just rewound.
(Editing by Greg Mahlich)