(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters)
Zinc has emerged as the unlikely star performer in the London Metal Exchange (LME) base metals suite.
LME three-month zinc hit a fresh 18-month high of $2,793 per tonne on Friday and is even outperforming high-flying copper.
The trigger for the latest leap higher was news that the Gamsberg mine in South Africa is shuttered until further notice while a search continues for two miners missing after an accident.
This is another unexpected hit to a raw materials supply chain already wrecked by covid-19 mine lockdowns.
Demand, meanwhile, is running strong in China, where zinc has been sucked into steel’s bull orbit.
The same cannot be said of the rest of the world but surplus zinc is being absorbed by the supply chain as “stealth stocks”, accumulating away from the market’s view in the form of rising LME shadow inventory and producer stocks.
That is helping the bullish optics.
The temporary closure of Gamsberg, which came on line in late 2018 and was in the process of ramping up to first-stage capacity of 250,000 tonnes per year, has left another hole in the mined concentrates market.
Zinc and sister metal lead have been hard hit this year by national quarantines in key supplier countries such as Peru, Bolivia and Mexico.
A market that was expected to register a significant excess of mine production this year is now running short.
The International Lead and Zinc Study Group (ILZSG) was anticipating a 4.7% surge in mined output this year when it met in October 2019. Fast forward to October 2020 and the outlook is now for global production to actually fall by 4.4%.
The tensions in the raw materials segment of the zinc supply chain are clear to see.
Smelter treatment charges in China have tumbled to two-year lows under $100 per tonne as operators compete for concentrates. That’s a long, long way below this year’s benchmark terms of $299.75.
It’s maybe no coincidence that one of China’s largest players, Minmetals, is now calling for the creation of a Chinese zinc smelters group – along the lines of an existing collective for copper – to negotiate with miners on concentrate supply and pricing.
Smelter margins are being squeezed and concentrates availability is unlikely to improve dramatically before smelters and miners lock horns on next year’s treatment charge benchmark.
As with the rest of the base metals pack, zinc’s rally has been forged in China.
Shanghai zinc has been dragged into a raging bull market in the steel sector, as locals bet on anything that will benefit from the latest government construction and infrastructure stimulus.
Zinc is an obvious beneficiary of China’s steel boom since galvanised steel accounts for about half of the metal’s usage.
Zinc is used both as a construction material and in the white goods that fill a newly-completed apartment.
China’s output of air-conditioners, refrigerators and washing machines slumped by 14% over the first half of the year but bounced 13% year-on-year in the third quarter, according to Citi. (“China White Goods Production and Metal Implications”, Nov. 18, 2020).
Citi is expecting the recovery in output to continue as the current construction boom translates into more property completions, at which stage white goods enter the equation.
A mine supply crunch and Chinese demand recovery are the twin motors of zinc’s resurgence from a covid-19 low of $1,675 in March.
Missing, however, is any sign of physical tightness in the refined metal segment of the market.
China has soaked up the rest of the world’s excess copper and a good part of its aluminum since recovering from the pandemic.
But there has been no similar buying spree in the zinc market yet.
Cumulative net imports of 332,000 tonnes in the first nine months of this year were 24% lower than last year and the lowest January-September tally of any year since 2015.
Quite evidently, however acute the raw materials squeeze on Chinese smelters and however strong demand is running, China has had no need to step up its purchases from the rest of the world in the way that it did during the last financial crisis. The country’s net imports jumped to 640,000 tonnes in 2009 from just 112,000 tonnes in 2008.
Since China has not cleared the world’s surplus of zinc in the same way as it has done in the copper market, there may be a lot of metal around.
The ILZSG’s October forecast was for a supply-demand surplus of 620,000 tonnes this year.
Only part of that is in any way visible.
LME-registered stocks have risen by 171,500 tonnes this year, although from an acutely low base of just 51,200 tonnes at the end of December.
LME shadow stocks – metal not on warrant but being stored with the option of exchange delivery – rose by 65,000 tonnes between February and September.
There is more sitting in deeper storage in the physical supply chain.
The market has noticed a sharp drop in exports of refined zinc from Spain, home to the San Juan de Nieva smelter, one of the largest in the world and owned by metals powerhouse Glencore.
Spanish exports slid 41% to 161,603 tonnes in the first seven months of 2020, according to ILZSG figures.
It can be inferred that the missing 111,100 tonnes are sitting in cold storage.
The last financial crisis was a credit crisis, which is why so much metal turned up on the LME, which lived up to its name as the market of last resort.
There is no similar credit crunch in the covid-19 crisis, meaning excess stocks can be financed by the physical supply chain.
From a producer’s perspective, this helps support physical market premiums and, by keeping part of the surplus hidden away from the LME, accentuates the bull market optics.
The early-year surplus hasn’t gone away, however, even if it is currently out of sight.
Zinc has been here before in the middle of the last decade, a bullish mine supply picture jarring with high stocks of refined metal. It was an uncomfortable ride for bulls.
(Editing by David Clarke)