Smelter fees down - how come?I don't get this. If there is "supposedly" so much zinc out there, how come smelter fees are lower this year? Hmmm.
DJ Zinc Fees Settle At $300/Ton, To Cut Smelter Income-Macquarie
Sunday, March 30, 2008; Posted: 09:53 PM
SYDNEY, Mar 30, 2008 (Dow Jones Commodities News via Comtex) -- -- Zinc treatment charges, the fees charged by smelters to miners to turn concentrate into refined metal, have settled at $300 a metric ton with a London Metal Exchange basis price of $2,000/ton, Macquarie Bank said Monday.
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There is still no official confirmation, Macquarie said, but there appear to be some settlements in Asia for the annual treatment charges, an important source of revenue for smelters.
Dow Jones reported earlier this month Korea Zinc Co. (010130.SE) and Canadian miner Teck Cominco Ltd. (TCK) settled contract talks at $300/ton and $2,000/ton, quoting a person familiar with the situation.
In 2007, a shortage of zinc concentrate meant smelters had to accept lower smelting fees, also at $300/ton but with a basis price of $3,500/ton, pressuring profit margins.
Escalators, an important part of the benchmark deal that take into account changes on the underlying zinc price, are around +10% and -6%, "although this is not entirely clear," Macquarie said.
In China, settlements have concluded at $325/ton and $2500/ton with an up escalator of +11% and a down escalator of -7%, Macquarie said, and slightly lower than forecast.
"Smelters may be slightly disappointed by this outcome in what was looking like a heavily oversupplied concentrates market. However, spot treatment charges have been slipping in recent months, and the announced settlements are actually slightly higher than current spot terms of around $300/ton on an LME-flat basis," Macquarie said.
Another component of smelter revenue is the so-called "free metal." Smelters pay only for 85% of the zinc content of the concentrate they receive, but they may actually recover as much as 10% more.
Based on current LME forward prices, that metal will be worth less than last year's, Macquarie said.
"Putting all those factors together - a flat base TC (treatment charge), higher price escalation, but lower bonus metal and physical premiums, a smelter's revenues could be expected to decline by around 12% in 2008," Macquarie said.
Analysts had pegged smelters' negotiating stance at $350-$375/ton with a basis price of $2,500/ton, and those of miners such as Teck Cominco around $275/ton.
Zinc is primarily used to galvanize steel products.