LONDON (Reuters) - “The most critical issue facing the zinc market is the performance of zinc smelters and Chinese zinc smelters in particular.”
A potential smelter bottleneck topped research house Wood Mackenzie’s January zinc list of “Things to look for in 2019”.
And so it has proved.
The world’s zinc mines lifted production by 1.9% in the first half of this year, according to the latest statistical bulletin from the International Lead and Zinc Study Group.
However, world refined metal production fell by 0.4% over the same period.
The surprise is that it’s not Chinese smelters that have been having problems, but rather those in the rest of the world.
This continuing supply-chain dysfunction is holding the zinc price in uneasy limbo between a bear narrative of supply surplus and smelters’ collective struggle to make that surplus tangible in the form of refined metal.
Skorpion Zinc, operator of a mine and refinery in Namibia, is the latest producer to join the lengthening casualty list.
Skorpion, owned by India’s Vedanta, will close the refinery from early November through the end of February 2020.
This is down to a “slope failure” in part of the mine back in May that has deprived the refinery of sufficient feed.
The mine is fast approaching the end of its life and production has been declining in recent years. Last year’s refined zinc output was 67,000 tonnes, a marginal footnote in a global 13-million-tonne market.
The loss of metal will therefore be marginal as well.
However, the proliferation of such smelter outages is creating a cumulative impact that is anything but marginal.
Canada’s Teck Resources will lose 20,000-30,000 tonnes of production from its Trail smelter after an electrical equipment failure in August.
Another Canadian smelter, CEZ, will produce 15,000 tonnes less than expected this year due to unplanned maintenance in the second quarter and “filtration capacity limitations”, according to owner Noranda Income Fund’s Q2 report.
Across the border, the 155,000-tonnes-per-year Mooresboro refinery in North Carolina is still out of action after an April fire.
Gone for good is Russia’s 110,000-tonnes-per-year Electrozinc smelter after a devastating fire in October last year.
None of these closures would be individually enough to cause supply-chain disruption. Cumulatively, however, they are acting to slow the surplus in mined raw materials transitioning into a surplus of metal.
The only place in which zinc production is performing to script is China.
“Smelter ramp-up in China is progressing strongly as we have been expecting with (National Bureau of Statistics) data indicating more than 8% growth in output year-on-year through August,” according to analysts at JPMorgan (“Metals Quarterly,” Sept. 23, 2019).
The bank expects China’s refined zinc production to rise by 6.5% this year as higher charges for converting mined concentrates into metal incentivise Chinese smelters to lift operating rates.
China’s smelters may be doing what everyone expected but there are three curiosities in the Chinese zinc market right now.
The first is the surprisingly low level of concentrate imports, which were down 1.3% year-on-year in the first eight months of 2019. The inference is that Chinese smelters have been relying on domestic mines or drawing down stocks rather than feasting on Western mine surplus.
The second anomaly is the lack of build in visible Shanghai exchange stocks. At 70,172 tonnes they are up 50,000 tonnes from a very low base at the start of January but some way off the year-to-date peak of 124,000 tonnes in March.
Which begs the question of where all the metal is going, given zinc demand is not immune to ongoing weakness in China’s automotive and manufacturing sectors.
The lack of visible stock build may be the reason for the third curiosity, namely China’s continued strong imports of refined zinc.
These have risen 23% to 449,000 tonnes so far this year, with August’s tally of 67,600 tonnes the highest monthly total since April.
The largest part of those August imports, 43,000 tonnes, went into bonded warehouses, which might be the very first sign that China’s appetite for imported zinc is fading.
But for now, hard evidence of surplus in the Chinese market is as elusive as it is in the West.
London Metal Exchange (LME) stocks remain desperately low at 61,625 tonnes, less than two days’ worth of global usage.
Arrivals have been few and far between, while departures are running daily with another 18,825 tonnes in the cancelled category awaiting physical load-out.
LME time-spreads have tightened over the last month, the benchmark cash-to-three-months period closing Monday valued at a $24-per-tonne backwardation.
“Visible and undisputable signs of the growing refined surplus are taking a long while to emerge,” concedes JPMorgan.
The bank is forecasting an average price of $2,250 per tonne this quarter, “only slightly lower than spot, to account for a bit more sideways trading in the near term as market participants wait for stronger evidence of surplus”.
LME three-month zinc is currently trading around $2,430 per tonne.
Next year, though, JPMorgan is looking for the zinc price to drop “towards cost support and a quarterly average low of around $1,850/t in 3Q20”.
It is in good company.
Macquarie Bank expects the zinc price to be “held down for 2-3 years closer to $2,000/t”. (“Commodities Compendium”, Sept. 23, 2019).
Morgan Stanley has just cut its 2020 forecast to $1.01/lb ($2,227 per tonne) with “a move into persistent surplus driving price to marginal cost by end-2020”. (“Metal & Rock”, Sept. 23, 2019)
Goldman Sachs is equally bearish, slashing its three-month and six-month forecasts to $2,150 and $2,000 from $2,500 and $2,400 respectively.
It now expects zinc to hit a low of $1,850 in 12 months’ time, down from a previous low call of $2,300. (“Zinc: Back to surplus after supply twists and turns”, Sept. 5, 2019)
The bear logic is unarguable.
Mine supply is unquestionably increasing and demand is unquestionably deteriorating, as is the case across the base metals spectrum.
The only problem is the bit in the middle, the ability of the world’s smelters to transform concentrate into metal.
The smelter bottleneck has already proved much stickier than expected. Outages such as that at Skorpion make it stickier still.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Dale Hudson