The zinc surplus - here today, gone tomorrow?From www.mineweb.net BASE METALS
STOCKS HOLD THE KEY
The zinc surplus - here today, gone tomorrow?
LME zinc stocks now falling and there has been an unprecedented surgeof metal into China. The concentrates market is tightening. Can minesupply respond ?
Author: Andy Home*
Posted:Friday,01 May 2009
LONDON (Reuters) -
The LME three-month zinc price has risen 18 percent so far this year, making zinc the third best performer among LME base metals (after copper and lead).
Which is somewhat surprising, since the International Lead and ZincStudy Group (ILZSG) has just forecast the global market will record aproduction-consumption surplus of just over 260,000 tonnes in 2009.It will, moreover, be the third consecutive year of surplus,following on a near-300,000-tonne surplus in 2007-2008, according toILZSG calculations.
Why then the market's relatively exuberant year-to-date performance? Is it pricing in a much smaller surplus or even no surplus at all?The answer could well be a bit of both.
VANISHING VISIBILITY
LME stocks, as the most visible expression of market balance, holdthe key to what is currently going on in the zinc market. LMEinventory rose by 165,000 tonnes last year and surged another 104,250tonnes in the first two months of 2009, peaking at 362,275 tonnes onFeb. 25.
Since then, however, the flow of metal has reversed andexchange-registered inventory has fallen by 33,325 tonnes to 328,950tonnes. That represents a very modest 11 days' of anticipated 2009consumption.
Compare and contrast with the last peak in LME stocks in April2004. Back then they reached 787,150 tonnes, equivalent to 27 days'worth of global consumption.
A strong supply-side response to the collapse in demand has playeda big role in mitigating the sort of build seen five years ago. As Nyrstar, the world's largest producer of zinc metal, hailed inits just-released 2008 report, "the zinc industry responded morewidely, quickly and decisively than in previous downturns to the sharpdrop in zinc demand". Nyrstar itself reported a massive 30-percentdecline in first quarter 2009 production relative to the precedingquarter (Q4 08).
However, that is only part of the explanation for the change oftrend in LME zinc stocks. The other part comes in the form of thesurge in zinc metal imports into China. The country's trade in zinc hasbeen extremely volatile in recent years but the current movement ofmetal is unprecedented, as can be seen in the following graphic.
https://communities.thomsonreuters.com/ClientFiles/97373da2-3d62-458a-9d2b-8d9a6f11b70c/20090430chinznimports.gif Part of China's import tonnage has been drawn down from the LMEsystem. It's noticeable that the two key LME zinc locations in Asia,Singapore and Johor, are both showing year-to-date declines of over10,000 tonnes. The two locations also account for 17,800 tonnes of thetotal 20,200 tonnes of metal sitting in the cancelled warrant category.
As with other metals, most particularly copper, zinc is benefitingfrom Beijing's industry support programme.
The State Reserve Bureau hasbought up 159,000 tonnes and several regional governments have announced their own mechanisms for helping struggling zinc producers.
As such, the movement of metal amounts to little more than visible LME surplus being shifted to invisible non-LME surplus. However, as also with copper, the drain on LME stocks is impossibleto ignore for LME traders, which is why neither the red metal nor zincparticularly feels like it is in supply-demand surplus.
VANISHING SURPLUS
However, it is not just zinc metal that is responding to the open arbitrage between Shanghai and London.
Zinc concentrate imports are also rising, up 16 percent in thefirst quarter of this year. Unlike zinc metal, this may be material theWestern market can ill afford to lose.
In its spring 2009 forecasts the ILZSG noted that global mineproduction is expected to fall at a faster pace (6 percent) thanrefined metal production (4 percent). This reflects the wholesaleclosure of marginal mines and deferral of new projects in response to azinc price collapse that preceded the global financial turmoil of latelast year.
It will also leave the zinc concentrates market in small (100,000-tonne) deficit, according to ILZSG.
Spot treatment charges (TCs) for smelting concentrate are alreadyfalling in response to this building tension in the raw materialsmarket and Nyrstar felt it worth stressing in its Q1 2008 managementreport that the decline in terms is due only to the current arbitrageand "does not reflect a physical shortage in the markets for zinc andlead concentrates."
From the other side of the smelter-miner divide, however, comes aslightly different view. In its Q1 report Canada's Inmet Mining saidthat "we expect zinc mine production in 2009 to be below smeltingrequirements, and believe that a balanced or deficit zinc concentratemarket could evolve."
Zinc's problem going forwards is that mine supply may have lostsome of the elasticity to higher prices that was seen in 2006-2007,when multiple restarts filled the news headlines.
Many of the junior operators that tried to cash in on the bullmarket rally to over $4,000 were devastated by the timing and severityof the subsequent crash, particularly since it coincided with a severeconstriction in credit availability.
The likes of Canada's SRA, Blue Note Metals and Acadian Mining werenot only forced to drastically scale back or even mothballrecently-started operations but were sent reeling into bankruptcyprotection.
At the same time several important established mines are fastapproaching the end of their lives. Sweden's Lundin, for example, willbring forward to this year from 2011 the permanent closure of itsGalmoy mine in Ireland. Its Storliden mine in Sweden closed permanentlyat the end of last year.
Xstrata's big (250,000-tonne) Brunswick mine in Canada is also fastapproaching the end of the road, currently pencilled in for late nextyear.
Right now none of this seems very relevant while demand is still sobombed out. But the zinc price is begging to differ. That forecast2009 metal surplus may look large but it is fast disappearing intoChina, even while the raw materials market looks in danger of swingingfrom surplus into deficit before the year is out.
© Thomson Reuters 2009 All rights reserved
* Andy Home is a Reuters columnist. The opinions expressed are his own.