Andy Home: Zinc concentrations are squeezed but metal is not in short supply
The global zinc mine production is continuing to decline and raw material shortages are now beginning to affect China, in particular. The 14 Chinese smelters that account for 70% of China's refined Zinc production agreed to postpone new capacity and adjust maintenance plans in order to maintain operating margins.
The impact of this on production rates is yet to be determined. These announcements are more likely to be a price signal rather than a concrete action plan.
Zinc futures contracts on the Shanghai Futures Exchange (ShFE), the largest contract, rose by 10% in response to the news.
Zinc bulls are still facing a problem, as the refined market for zinc is still in a significant surplus, even though the supply chain of raw materials is tightening.
CONCENTRATES SQUEEZE
According to the International Lead and Zinc Study Group (ILZSG's) mid-term report, the world zinc mine production dropped by 3.4% on an annual basis in the first six months of 2024.
The global output is expected to fall by 2.4% by 2022, and then by another 2.0% by 2023. This year will be the third consecutive decline.
China is the largest producer of refined zinc in the world, so it is especially exposed to the shortage of raw materials.
According to Shanghai Metal Market, the squeeze on mined concentrates can be seen in China's spot market. Treatment charges for imported concentrates are at a multi-year record low of just $10 per ton.
Smelter fees tend to increase during times of abundant availability and decrease during periods when there is a shortage.
The current spot prices are far below the benchmark annual smelter terms, which were $165 per tonne agreed at the beginning of the year. They are at levels where many operators are no longer profitable.
This has led to a sharp decrease in imports of concentrates. In the first seven month of 2024, inbound shipments dropped by 22% on an annual basis to 2.1 millions metric tons. The arrivals so far in 2019 have been at the lowest level since 2009.
CHINA'S DOMESTIC MARKET TIGHTENS...
This year, the Chinese smelter's production has been limited by a lack of raw materials but not significantly.
SMM estimates that the country's primary refined zinc production decreased by 2.8% on an annual basis to 3.67 millions tons during the period January-July, though some of this decline was caused by operational constraints due to heavy rains in the province Sichuan.
ShFE's inventory is down from a peak in April of 131 747 tons, but still higher than the beginning of January.
Imports rose 37% in the first seven month of 2024 to reach 240,500 tonnes. However, arrivals dropped sharply in July to 18,452 tonnes, the lowest total since May of last year.
The domestic market for refined metals is beginning to contract due to the continued squeeze on raw materials.
...BUT GLOBAL MARKET IS STILL IN SURPLUS
It is not the same outside of China.
According to ILZSG, global refined zinc production decreased by a small 0.1% during the first half year.
After the 2022-2023 power crisis, European smelters restarted. Glencore restarted its Nordenham smelter, located in Germany, in the first quarter of this year after a period of inactivity that lasted more than one year. Nyrstar, a Belgian producer, followed suit with its Dutch smelter Budel in May.
According to ILZSG, the global refined zinc industry generated a surplus of 228,000 tonnes in the first half 2024.
A large portion of this excess metal has been shipped to the London Metal Exchange warehouses. LME zinc stocks, on and off warrant, increased by 132,000 tonnes between January and June.
The benchmark period is three months of cash
Zinc bulls have been focusing on the supply of raw materials, but demand has not been as strong.
Construction, which is particularly weak in China and Europe, accounts for around half of the global zinc demand.
The London 3-month zinc price, which is currently trading at around $2,910 a ton, has followed the Shanghai rebound and is up 9.0% since the beginning of the year.
If the market wants to continue its rally, then it will need to hear better news about the demand side in order to support the bullish story on supply.
These are the opinions of a columnist who writes for.
(source: Reuters)
