Chinese ban may breathe new life into zinc price rally

Zinc is the best performing base metal so far this year and measured from its multi-year low struck mid-January the zinc prize is up 54%.

Zinc's prospects brightened considerably after the shutdown of two major mines last year – Australia's Century and the Lisheen mine in Ireland. The two mines had a combined output of more than 630,000.

Top zinc producer Glencore has been out in front when it comes to curtailing production to shore up prices and the Swiss giants' announcement of cutbacks inspired another leg up in the price. The Swiss giant's first half production numbers released last week showed a 31% output decline to 506,000 tonnes after the company idled mines in Peru and downscaled its Australia operations.

Chinese ban may breathe new life into zinc price rally

Source: Quandl

Now China, top consumer and producer of the metal mainly used to galvanize steel, could add fuel to the fire after news that Beijing has ordered the shutdown of all lead and zinc mines in parts of Hunan province, the centre of Chinese production.

The local government shut down the power to 26 zinc and lead mines in the area due to safety and environmental concerns. The ban will be in place until June next year reports Platts News:

China is forecast to have a mined zinc deficit of 390,000 mt in 2016, widening from a deficit of 9,000 mt a year ago, state-owned Chinese metals consultancy Beijing Antaike said in its zinc sector report issued in end-June.

China has been increasing imports due to dwindling domestic supply – imports rose 48% to 292,000 tonnes in the six months to June from a year ago according to customs data. Reuters reports falling stocks and predictions of a 221,000 tonne market deficit are also lifting sentiment:

Key to market psychology has been the concentrate market, which has tightened to the extent that treatment charges, fees paid by miners to smelters to process raw material into metal have tumbled towards $100 a tonne from above $200 in April 2015.

Speculation has now turned to whether producers would bring mines back into production.  In the half year report Glencore kept full year guidance on zinc production steady at lower levels.

A table tucked away in the report gave an indication why. Despite zinc's huge run-up this year the average price in the first half is still 16% below the same period last year. Glencore may be looking for further evidence zinc has entered a new boom phase before switching on its considerable capacity.