Aluminium and Zinc Futures contracts will be listed to satisfy investor appetite
The Dubai Gold & Commodities Exchange (DGCX) and Dubai Commodities Clearing Corporation (DCCC) today announced an expansion to their existing portfolio of metals products with the launch of new base metal products. The two new products, Aluminium Futures and Zinc Futures, will go live on Friday 22nd March 2019.
The new products will provide investors with an opportunity to mitigate the risks involved in the base metal markets and appeal to global participants by enabling them to hedge prices efficiently. The size of each Aluminium Futures and Zinc Futures contract will be 5 metric tons (MT), denominated and traded in US dollars.
Les Male, CEO of DGCX, commented: “We are excited to introduce new products to meet the ever-growing needs of our member community. The imminent launch of these two products is a response to growing demands and investor feedback and will play an important role in the DGCX Group’s growth strategy moving forward. We are confident that they will further strengthen our value proposition to all participants across the non-ferrous metals supply chain while complementing our existing portfolio of diverse products.”
The new products will be cash settled in US Dollars, and EFS, EFP and Block trading will be permissible in the contracts.
“All trades in the new contracts will be cleared by our wholly-owned and regulated clearing house, the Dubai Commodities Clearing Corporation (DCCC). The DCCC is recognized by ESMA as a Third-Country Central Counter Party and has rightfully earned itself a credible reputation acting as a guarantor to all trades executed on the DGCX,” Male added.
The London Metal Exchange (LME) launched seven new cash-settled futures contracts on Monday, including hot-rolled coil (HRC) steel, alumina and cobalt, aiming to attract more business after profits fell last year.
The world’s oldest and largest market for industrial metals wants a stronger portfolio of products as competition intensifies with rival exchanges, such as CME Group Inc. of the United States.
Trading was thin in the new contracts on Monday, but industry participants said it often took time for activity to gear up. By early afternoon in London, the only trades among the new contracts had been 40 lots of aluminum premiums.
“It’s normal, most steel contract launches go slow,” said Jeff Kabel, chairman emeritus at the International Steel Trade Association (ISTA). “There could be some trades today, but I’d give it till mid-week or so.”
The steel and alumina contracts have the best chance of succeeding, according to analysts, traders and other industry sources.
The 142-year-old LME has lost market share in recent years to the CME and China’s Shanghai Futures Exchange (ShFE).
The LME has been slower than its rivals to launch new products, but it has recently developed new technology that makes launching new contracts easier, faster and less expensive.
The exchange hopes to boost volumes to make up for weaker revenues last year resulting from fee cuts as it rowed back after heavy criticism about a previous jump in fees.
Volumes at the LME rose 5 percent last year, but core profit fell by 10 percent in the commodities segment of its parent, Hong Kong Exchanges and Clearing Ltd.
MASSIVE STEEL SECTOR
The LME has high hopes for its new HRC contracts, believing it can tap into a massive global steel sector that has seen surging volumes develop in Chinese ferrous contracts.
HRC is steel that is heat processed into metal sheets used for car bodies and household appliances.
The LME is launching regional HRC contracts initially covering North America and China, and later adding northern Europe.
The LME already has steel rebar and scrap contracts.
The LME also plans to launch a contract for alumina, the raw material to make aluminum, which has seen sharp price swings recently.
The alumina price twice spiked and tumbled last year, opening up a market for both consumers and producers to hedge the price.
The LME already has a physically-settled contract in cobalt, a metal key for electric vehicle batteries, but it hopes to gain more traction with its new cash-settled product <.
The other new products are minor metal molybdenum plus two regional aluminum premium contracts for U.S. Midwest and Europe.
After facing a tumultuous 2018, Wood Mackenzie Senior Research Analyst Rory Townsend feels that zinc smelters — not the miners — will push the battered commodity forward this year.
In a presentation given at the Prospectors and Developers Association of Canada convention in Toronto, Canada, Townsend started by explaining some of zinc’s 2018 ups and downs.
“After reaching the highs of about US$3,600 in mid-February, [it] then fell to subsequent lows below US$2,300 in September. While we do feel that the peak in the price was premature, we don’t feel that the dramatic fall in the price was supported by fundamentals as metal stocks continued to fall through the year,” he said.
“So what was driving the zinc price? All the negative sentiment being driven by the escalation of trade disputes between the US and many of its major trading partners. As the year progressed, it became clear that the global economy was cooling, and with it, sentiment and metal prices deteriorated further.”
With 2019 already in progress, Townsend laid out Wood Mackenzie’s predictions surrounding zinc mine production and what it means for the concentrate market.
“We’re expecting a surge in mine production capability over the next few years. With increased production from Glencore’s (LSE:GLEN) Lady Loretta and McArthur River, to a host of projects and restarts ramping up such as MMG’s (HKEX:1208) Dugald River, Vedanta Zinc International’s Gamsberg … and Heron Resource’s (ASX:HRR) Woodlawn, to name a few.” he said.
“So what does this new mine supply mean for the concentrate market? We’re expecting sequential years of global concentrate surplus for the next few years. This concentrate surplus is expected to be very large, peaking at over 800,000 tonnes per annum in 2020 and 2021.”
Having titled his presentation “Zinc: Concentrate on the smelters, not the miners”, the senior research analyst emphasized that while production rates look promising, market watchers should keep their eyes on the smelters.
“With regards to the global benchmark contract, the concentrate surplus, which we’ve forecast for this year should put an advantage in the hands of the smelters when it comes to the annum contract negotiations, and we’re expecting them to be certainly higher than what they were last year. We may well see escalators return to the contract,” he said.
“Increased availability of concentrate combined with increased treatment charge revenue should enable global utilization rates to increase from 82 percent last year to 86 percent this year. Rest of the world smelters are already operating at around 92 percent utilization, so pretty high, but we’re expecting this to increase to historical highs around 2020.”
As of March 5, zinc was trading at US$2,786 per tonne on the London Metal Exchange.
Zinc prices jumped to a seven-month peak overnight, driven higher by a supply shortfall, dwindling stockpiles on the London Metal Exchange (LME) and expectations of solid demand from top consumer China.
Benchmark zinc on the LME ended up 3.7 per cent at USD 2,838 a tonne after touching USD 2,840, the highest since July 3.
The metal, used to galvanize steel, is up about 15 per cent this year.
Mines have begun to produce more zinc concentrate but not enough metal is being refined to satisfy demand, pushing stocks in LME warehouses to their lowest in more than a decade and driving up the premium for nearby metal.
“The refined market is still very, very tight,” said ICBC Standard analyst Marcus Garvey.
“We’re probably not going back to a refined surplus until next year.”
He also said recent increases in lending and local government bond issuance in China suggests demand for metals will remain solid through this year.
Headline LME zinc stocks have fallen to 59,200 tonnes, the lowest since October 2007 .
Between 50 and 79 per cent of warrants are held by a single entity and about a quarter of the metal is already earmarked for delivery.
Suggesting a shortage of immediately available metal on the LME, the premium for cash zinc over the three-month contract has surged to USD49.50, the highest in two months.
The International Lead and Zinc Study Group (ILZSG) said on Monday the global zinc market deficit narrowed to 28,000 tonnes in January from a revised deficit of 62,400 tonnes in December.
The ILZSG showed a deficit of 384,000 tonnes last year and shortfalls of 442,000 tonnes and 128,000 tonnes respectively in 2017 and 2016.
Analysts expect a fourth deficit this year.
Speculative investors trimmed their net long position in LME zinc to 5 per cent of open contracts at the end of last week from 9.3 per cent in early February, according to brokers Marex Spectron.
LME copper finished up 1 per cent at USD 6,472 a tonne, nearing a 7-month high of USD 6,540 touched on February 25.
Headline LME copper stocks at 112,725 tonnes are the lowest since May 2008, and between 50 and 79 per cent of warrants are held by one entity, keeping the premium for cash metal over the three-month contract unusually high at USD 26 a tonne.
The US dollar weakened for a third day, helping boost metals by making them cheaper for buyers holding other currencies.
Aluminium closed up 1.4 per cent at USD 1,873 a tonne, nickel rose 1.6 per cent to USD 13,100, lead added 0.5 per cent to USD 2,085 and tin ended 1.3 per cent higher at USD 21,325.
Vedanta Zinc International is facing a 5-week shutdown at its zinc refinery in Namibia following a strike by its mining contractor, which depleted stocks at the refinery.
According to Reuters, miners were on strike from February 22 to March 6 which affected waste-stripping and ore mining at the asset. A spokesman for the Vedanta Resources (NYSE:VEDL) subsidiary told the outlet that the Skorpion zinc refinery continued to operate during the strike, clearing out ore stocks on hand.
“It has therefore been decided to shut the refinery for a period of five weeks to allow the mine to rebuild adequate stock levels,” the spokesman said.
The company said it would take the shutdown as an opportunity to conduct maintenance as opposed to later on in the year.
“Every effort is being made to ensure that South African customers will not be affected by the temporary suspension, as they will be supplied from current inventory as far as this is possible,” the company said.
The shutdown comes just weeks after the company officially opened its Gamsberg zinc mine in South Africa’s Northern Cape province. The asset’s first phase is expected to produce 4 million tonnes of ore per year from its open pit and 250,000 tonnes of concentrate per year from the concentrator plant.
Meanwhile, refined zinc production at Skorpion is expected to hit 130 kilotonnes by 2020.
Zinc, which was trading at US$2,877 per metric tonne on the London Metal Exchange (LME) as of March 13, has spent the last month holding steady with incremental moves upwards. However, analysts at FocusEconomics see the base metal’s price point sliding downwards, with a predicted price of US$2,633 per metric tonne by Q4 of this year.
Vedanta’s share price made minimal movement by 11:41 a.m. EST on the NYSE, growing 0.25 percent to reach US$9.945 per stock.
Another 100 tonnes of zinc were loaded out of the London Metal Exchange (LME) warehouse system on Monday.
It wasn’t the most dramatic of moves but sufficient to reduce LME stocks to a fresh 12-year low of 58,325 tonnes – less than two days’ worth of global consumption and within touching distance of this century’s nadir of 58,100 tonnes recorded in October 2007.
Such desperately low inventory has rekindled zinc’s bull flames. The LME three-month price rose to an eight-month high of $2,882 per tonne last week, up 18 percent this year, before easing slightly to current levels of $2,800.
Time spreads remain tight and volatile but the premium for cash metal has so far failed to attract anything more than a smattering of fresh deliveries.
The persistent tightness of LME stocks is forcing a collective rethink about the outlook for zinc, particularly the much anticipated shift to supply surplus.
RUNNING ON EMPTY
LME zinc stocks have fallen by 1.18 million tonnes from their 2012 peak.
The exchange’s stock reports have thrown up many surprises over the intervening years, with the downtrend sporadically interrupted by mass movements of off-market metal onto LME warrant, particularly in New Orleans.
But the New Orleans zinc round-about appears to have ground to a halt. The last significant inflow at the port was in October and there have been no arrivals at all this year.
The only zinc to enter the LME warehouse system in 2019 has been a highly modest 2,150 tonnes at the Spanish port of Bilbao and a single-lot delivery of 25 tonnes at the Belgian port of Antwerp.
Moreover, the headline LME stock figure includes 14,125 tonnes of metal earmarked for physical load-out, leaving just 44,200 tonnes of what are termed “open” stocks.
Between 80 and 90 percent of that is held by one entity, according to the LME’s latest report, with the size of the position prompting the exchange to enforce lending rules to limit the daily pain for shorts trying to roll positions forwards.
The benchmark LME time spread, cash-to-three-months, ended Monday valued at $36 per tonne backwardation. The cost of rolling a position overnight, the “tom-next” spread, was $3 at one stage this morning.
Short position holders should be grateful for the LME’s lending rules. Such low stocks would once have generated ferocious backwardations – where spot prices are higher than forward prices.
The widest backwardation so far in this chapter of the zinc story was the $125 traded for cash-to-three-months in November.
If the downturn in stocks grinds on toward zero, such extreme spread contraction may yet return.
DESPERATELY SEEKING ZINC
LME stocks are only the visible tip of an industrial sector’s supply-chain inventory.
Traders, merchants and financiers can hold stocks off market in cheaper non-exchange warehouses. Stocks can be in transit or sitting in China’s bonded warehouses.
Assessing the size of such “gray” inventory is by its nature a tricky exercise.
Analysts at ICBC Standard Bank have posited a figure of around 650,000 tonnes, including 230,000 tonnes of onshore and bonded Chinese stocks. (“Zinc – Where is the metal?”, Feb. 18, 2019)
However, it’s becoming increasingly clear that if there are some 400,000 tonnes of off-market stocks outside of China, the owners are not interested in delivering them to an LME warehouse, at least not at the current cash premium incentive.
Compare and contrast that with the LME copper market, where stocks had also fallen to extremely low levels, pushing spreads tighter.
The broader availability of copper was amply demonstrated by last week’s 80,000-tonne surge of deliveries into the LME system.
The broader availability of zinc is being tested and found wanting.
CHINESE STOCKS UP, PRODUCTION DOWN
That there is zinc in China should not be surprising given the country’s strong imports of refined metal. Last year’s tally of 713,355 tonnes was the highest ever and the second consecutive year of record imports.
Rising zinc stocks on the Shanghai Futures Exchange (ShFE) — up by 103,935 tonnes since the start of January to 124,038 tonnes — would seem to signal a replenishment of China’s own depleted supply chain.
Appearances can be deceptive, however.
ShFE stocks always rise over the first couple of months of the Western year, reflecting a seasonal low point for manufacturing demand and the Lunar New Year holidays.
Last year’s seasonal build was 90,000 tonnes to the end of March, providing some perspective on this year’s increase.
China shows every sign of being in a deficit market, where imports plug supply gaps.
Raw material from new and reopened mines should be boosting the country’s smelters as treatment charges have soared to over $200 per tonne for refining mined concentrate into metal.
Yet Chinese production keeps falling. National refined zinc output slid 3.2 percent last year and was down another 8.2 percent in the first two months of this year, according to the official statistics agency.
The need to comply with ever tighter environmental regulation is acting as a powerful counterbalance to the financial incentive to maximize production.
This smelter bottleneck is preventing new mine supply translating into better refined metal supply.
LIVING WITH BACKWARDATION?
The time-line for zinc’s return to market surplus keeps shifting.
ICBC Standard expects the concentrates market to return to balance this year before heading into surplus in 2020.
However, the refined market will remain in deficit to the tune of 100,000-200,000 tonnes this year, split between surplus outside China and a large 600,000-700,000-tonne shortfall in China itself, according to the bank.
“We therefore expect the SHFE-LME (arbitrage) to remain open for much of the year, pulling international metal and concentrate into China,” it said.
If ICBC Standard is right, the LME zinc contract is going to have to get used to such paltry stock levels.
Which means it’s also going to have to learn to live with the resulting time spread tightness.
Backwardation could be here for a while.
Commodity giant Glencore on Friday said it had suspended operations at its McArthur River zinc mine in northern Australia as a cyclone approaches.
Authorities have declared a state of emergency in the region as Tropical Cyclone Trevor nears, with the nation’s weather bureau on Friday saying the storm was intensifying and warning of a “severe impact” ahead of landfall on Saturday morning.
At the same time, areas further west are bracing for the arrival of another cyclone, named Veronica, with key iron ore ports there being cleared.
“(The McArthur River mine) is preparing for Cyclone Trevor in line with our standard cyclone procedures,” a Glencore spokesman said in a statement emailed to Reuters.
“We are suspending mining operations onsite and shipping operations at (the) Bing Bong loading facility.”
That comes after commodity giant Rio Tinto on Wednesday suspended its Weipa bauxite mining operations at the northeastern tip of the country ahead of the cyclone.
Meanwhile, Rio, BHP and Fortescue have all cleared their ships from ports ahead of Cyclone Veronica’s expected landfall south of the world’s largest iron ore export hub of Port Hedland on Sunday.
Tropical Cyclone Veronica is forecast to make a sharp turn at the coast, setting it on a path toward Australia’s biggest gas export hub and sparing the nation’s iron ore heartland.
After making landfall Sunday, the cyclone is lingering near the Western Australia coast and is forecast to weaken further Monday as it moves west toward the Burrup Peninsula, according to the weather bureau. That’s in the direction of some of the nation’s biggest liquefied natural gas projects, including the Woodside Petroleum Ltd.-operated North West Shelf LNG and Chevron Corp.’s Gorgon LNG.
Woodside on Monday said that the NWS and Pluto LNG projects near Dampier are using essential staff only at the plants and that it evacuated all workers from offshore platforms. Chevron didn’t respond to requests for comment. Both projects last week were rescheduling cargo loadings as the storm approached, according to traders with knowledge of the situation.
While Veronica has eased to a category 2 cyclone, it’s still lashing the coast with destructive winds in excess of 125 kilometers (78 miles) per hour and dumping heavy rain conducive to major flooding. Ships left ports and workers were evacuated last week ahead of the approaching storm, which was initially forecast to track inland through the Pilbara, the region where BHP Group and Rio Tinto Group have major iron ore mining operations.
BHP was deploying staff to assess damage after a red alert was lifted at Port Hedland, the country’s key iron ore export hub, the miner said in a statement. “Initial inspections show water damage to some buildings at Nelson Point,” the company said.
Lithium producer Altura Mining Ltd., which halted output at a mine in the northern Pilbara region, said the impact had been less severe than expected and wouldn’t cause damage to a processing plant. “It was apparent throughout Saturday and Sunday that the destructive winds forecast did not occur in the project or camp site area,” the company said in a statement.
While mines appeared to have been spared, export ports used by Rio, BHP and Fortescue Metals Group remain shuttered as the cyclone sits off the Pilbara coast. Port Hedland, Dampier and Ashburton are still closed, the Pilbara Ports Authority said in a statement. Dampier — used by Rio — remains subject to a cyclone red alert, according to Western Australia’s emergency services.
Australia’s north was also hit by Tropical Cyclone Trevor, which crossed the Northern Territory coast on Saturday morning as a category 4 storm with wind gusts of 250 kilometers per hour. The storm was downgraded to a tropical low on Sunday morning. Glencore said it was resuming operations at its McArthur River zinc mine and Bing Bong port, which had been evacuated earlier. South32 was also restarting the GEMCO manganese operation.
Zinc touched a two-week low on Wednesday on concerns that Chinese smelters will ramp up output, but prices were supported by a shortage of immediately available material on the London Metal Exchange (LME). Benchmark zinc on the LME closed 0.4 percent up at $2,873 a tonne after slipping to $2,842, its lowest since March 26.
Deficits have driven LME stocks to record lows and pushed zinc, used to galvanize steel, to a nine-month high of $2,958 on April 1.
But the supply situation is expected to change rapidly after Chinese treatment charges soared to $240 a tonne from a low of $12.50 at the start of 2018. Smelters are likely to seize the opportunity to make money by ramping up production in the second quarter, said Deutsche Bank analyst Nick Snowdon.
LME STOCKS/SPREAD: Headline stocks in LME-registered warehouses, at 52,550 tonnes, are down from 129,000 tonnes at the start of the year. The premium for cash zinc over the three-month contract has shot to $74.50 from close to zero in early February, suggesting a shortage of nearby material.
SHFE STOCKS: However, stockpiles in warehouses monitored by the Shanghai Futures Exchange (ShFE), at 108,772 tonnes, are up from about 20,000 tonnes at the start of the year.
MINE SUPPLY: Global mine supply of zinc is expected to rise 6.4 percent this year to 13.87 million tonnes, according to the International Lead and Zinc Study Group (ILZSG).
REFINED SUPPLY: But higher mine production has been slow to feed through to the refined market, with the ILZSG showing a 384,000 tonne deficit in 2018 and another shortfall in January.
GLOBAL GROWTH: The IMF cut its forecast for world economic growth this year to 3.3 percent from 3.5 percent and said the chances of further cuts are high.
TRADE WAR: U.S. President Donald Trump threatened to impose tariffs on $11 billion worth of European Union products, opening a new front in his trade war.
LAS BAMBAS: An indigenous community voted to suspend its two-month road blockade of Las Bambas, a large Peruvian copper mine, for two days until the government visits the region on Thursday.
ALUMINA: Emirates Global Aluminium said its Al Taweelah alumina refinery in Abu Dhabi had commenced operation. It is expected to produce 2 million tonnes of alumina a year once fully operational.
OTHER METALS: LME copper ended 0.4 percent down at $6,464 a tonne, aluminium fell 0.8 percent to $1,864, lead slipped 1.1 percent to $1,953.50 and tin eased by 0.1 percent to $20,850. Nickel did not trade but was bid 0.1 percent lower at $13,230.
New Century Resources’ successful ramp-up of plant performance at its Century zinc mine in Queensland is validating its decision to expand in 2019.
The company has completed installing a third mining cannon and pumping system, which allows the operations to ramp up to a mining rate of 8–10 million tonnes a year during the second quarter of 2019.
New Century will then ramp up to a 15 million tonne-a-year mining rate with the implementation of a total of five cannons by the end of 2019.
The operations’ metal production increased by 50 per cent during the first quarter of this year, hitting 18,170 tonnes of zinc metal in 37,500 tonnes of concentrate grading 48.3 per cent zinc (compared with 25,500 tonnes at 47 per cent in the fourth quarter of 2018).
The quality of Century’s zinc concentrate continued to improve significantly over the first quarter of this year, with a 25 per cent increase in the lead impurity content.
Century’s total zinc recoveries were averaging 50 per cent for March 2019 and peaking at 54 per cent – 86 per cent of the design target.
It demonstrates the significant improvement in its plant metallurgical performance at a time when wet season effects and mining of the tailings dam caused an eight per cent reduction in zinc metal mined, according to New Century.
Century’s silver content of 152 grams a tonne within the concentrate remained in line with previous quarter operations.
Belgian metals and mining company Nyrstar’s major shareholder Trafigura Group is set to take control of the company as part of a recapitalisation plan, Nyrstar said on Monday.
Nyrstar said it would sell its operating group to a newly incorporated subsidiary, NewCo. As part of its recapitalisation, commodities trader Trafigura will be issued 98 percent share capital of NewCo.
Trafigura will provide up to $250 million of secured financing to Nyrstar in order to keep its operations afloat in the interim period, Trafigura said here in a separate statement.
“Nyrstar has been faced with substantial financial and operational difficulties over the last few years, but it also has very solid industrial and mining operations on which we can build a stable future,” Trafigura Chief Executive Officer Jeremy Weir said.
Trafigura said the financing would be in addition to the $650 million working capital facility granted to Nyrstar in November.
Rating agency S&P downgraded Nyrstar’s bonds last month after the miner deferred payment of coupons due on its 2019 and 2024 bonds as it held restructuring talks with shareholders.
Zinc is coming under sustained attack from bearish funds.
The trigger for the assault was Tuesday morning’s London Metal Exchange (LME) stocks report, showing 10,625 tonnes of inflow into exchange warehouses.
The London zinc price slumped from $2,867.00 per tonne to $2,821.50 in 30 minutes. It stabilized briefly before heading lower and was last around $2,815.00.
Funds have pounced on the stocks signal as evidence that zinc’s period of maximum supply tightness is now passing.
They have been emboldened by signs that the raw materials segment of the supply chain has transitioned from shortfall to surplus. Metals surplus, zinc bears reason, must surely follow.
However, timing this shift in underlying market dynamics is difficult.
Similar bear attacks took place in September last year and again in February. In both cases they proved premature, the price recovering to a nine-month high of $2,958.00 at the start of April.
Have they called it right third time around? There are reasons to be cautious.
TREATMENT CHARGES SIGNAL RETURN TO SURPLUS
Zinc bears have got one thing right.
There can now be no doubting that the mined zinc concentrates segment of the market has flipped from supply deficit to surplus.
The gauge of the transition comes in the form of treatment charges, which are what a zinc smelter receives from a miner for converting concentrate into metal.
Spot charges have been on a steep upward trend in recent months as more raw material becomes available from new and restarted mines, such as New Century Resources, which has just reported a 50-percent jump in first-quarter production.
What looks like the benchmark deal for 2019 deliveries has confirmed the turnaround.
Canada’s Teck Resources and South Korean smelter Korea Zinc Inc have sealed a deal with a headline treatment charge of $245 per tonne.
That marks a sharp bounce from last year’s treatment charge of $147 per tonne and is the highest annual level achieved since 2015.
The swing in favor of smelters is reinforced by the return of price participation after two years of none.
The boost to smelter margins should stimulate higher capacity utilization and allow raw materials surplus to travel down the supply chain into improved availability of refined metal.
This is particularly true of China, where refined zinc production has been sliding for over a year due to lack of raw materials.
Outside of China, the jump in treatment charge should come as a welcome relief to beleaguered Nyrstar, the world’s second-largest refined zinc producer.
The Belgian company has seen margins crushed over the last year to the point that it’s needed another financial bail-out from Trafigura to survive. This one will see the Swiss trade house assume almost complete control with a 98-percent stake in a new operating company.
FEAST OR FAMINE IN REFINED METAL?
The change of supply dynamics in the zinc concentrates market has been closely followed by funds looking to play zinc from the short side.
Their problem so far is that it’s taken much longer than expected for mine surplus to become refined metal surplus, hence the two ultimately failed attempts to drive prices lower in the third quarter of last year and the first quarter of 2019.
Tuesday’s LME stocks report seems to be proof that things are starting to change in the refined metal market. But as ever with the London market, appearances can be deceptive.
The latest “arrivals” of zinc in the LME storage network bring the cumulative inflow so far this month to 20,800 tonnes.
That’s lifted headline LME inventory from a multi-year low of 50,425 tonnes to a current 66,475.
But this apparent evidence of surplus might counter-intuitively be a sign of continued market tightness.
It’s no coincidence that metal is flowing into the LME system right now.
It’s doing so because of another, particularly vicious cash-date squeeze on the LME zinc contract.
The LME’s “tom-next” spread, essentially the cost of rolling a short position overnight, flexed out to an unprecedented $60 per tonne last Friday.
That trade was something of a one-off, Refinitiv time and sales data showing the spread traded only once at that level in the form of an end-of-day client cross.
But “tom-next” remained in steep $20-per-tonne backwardation over the course of Monday morning ahead of the clear-out of April positions on the ensuing open outcry “ring” session.
“Tom-next” was on Tuesday morning trading more calmly but the broader cash-to-three-months spread remains tight, ending Monday valued at $68 backwardation.
Faced with such severe penalties for rolling short positions, some have evidently opted to deliver physical metal against their exposure.
The 8,000 tonnes of zinc that showed up in LME warehouses in Rotterdam in Tuesday morning’s report has all the signs of being a distress delivery from off-market storage.
True, it’s evidence that there is more metal “out there” beyond the depleted LME inventory but it’s only been drawn into the LME system by what is by historical standards an extreme level of tightness.
Timing zinc’s price peak is turning out to be just as tricky as timing the original rally.
There were several false starts to that rally as funds bought into the zinc deficit narrative only to be wrong-footed by sudden, large-tonnage deliveries of zinc into the LME storage network.
LME stock signals turned out to be a poor proxy for underlying market dynamics.
The question is whether they are any more reliable right now. This month’s deliveries of metal into LME sheds may not be a sign of imminent surplus but simply a normal market reaction to the elevated cash premium. That premium is predicated on a lack, rather than a surplus, of metal in the LME system.
Zinc bears are betting rising stocks mean the days of surplus have arrived.
If they’re wrong, there will be more pain for short-position holders in the weeks ahead.
Zinc prices sank to a one-month low on Thursday after inventories in London Metal Exchange (LME) warehouses climbed and weak manufacturing data in Europe took the shine off base metals.
Base metals prices had jumped in the previous session after upbeat GDP data from top consumer China but fell on Thursday as the dollar rose and manufacturing activity in Germany shrank.
LME zinc inventories MZNSTX-TOTAL rose to their highest level in nearly two months, up 7,225 tonnes to 73,575 tonnes, according to exchange data.
“It’s a broader weakness across base metals but zinc is definitely leading the way because stocks are up 11 percent,” said ING analyst Warren Patterson.
“We still are looking at a deficit in the zinc market but it is reducing,” he said.
LME zinc stocks have halved this year and touched their lowest since at least 1998 earlier this month due to bottlenecks in processing capacity, making the metal the second best performer in 2019.
Benchmark zinc finished 1.9 percent lower at $2,767 per tonne, after touching its lowest since mid-March at $2,751.
ZINC SPREADS: The premium of LME cash zinc over the three month contract CMZN0-3 was around $87 a tonne, down from a high of $120 touched a week ago.
TREATMENT CHARGES: Korea Zinc Inc and Teck Resources Ltd agreed annual concentrate treatment charges of about $245 a tonne, 67 percent higher than last year, as mine supply ramps up.
The agreement, along with higher spot treatment charges, is good news for smelters that have been struggling with low charges for years due to low mine supply.
“These are all signs that the concentrate supply picture is improving and that should feed through to the refined market eventually,” ING’s Patterson said.
DOLLAR: The dollar rose against a basket of currencies, making most metals it is priced in more expensive, including base metals.
Zinc prices hit their lowest since mid-March on worries about global demand and as inventories climbed, but other metals were supported by hopes that a U.S.-China trade deal would be agreed.
Investors have been worried after data on Tuesday showed factory growth in top metals consumer China slowed unexpectedly in April, with a survey on Thursday showing that Euro zone factory activity contracted for a third month.
“I think it’s still premature to buy. The current picture is that the worst is over, but conditions remain weak in the global economy. We need to see some real improvement for metals prices to really find the bottom,” said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan.
“But in zinc and copper, supplies are still pretty tight, so I think that will keep us from seeing severe losses.”
Benchmark zinc on the London Metal Exchange fell 1.5 percent in closing open-outcry trading to $2,731 a tonne after touching $2,717, its lowest since March 11.
Most industrial metals slumped on Wednesday as computer-driven funds sold after an options expiry, with aluminium and lead prices hitting their lowest in more than two years.
* ZINC STOCKS: LME zinc inventories MZNSTX-TOTAL rose to 88,750 tonnes, the highest since Feb. 15 and up 70 percent over the past three weeks, LME data showed on Thursday. However, prices are still low by historical levels and have slid by half since October.
* HINDUSTAN ZINC: India’s Hindustan Zinc, the world’s second-largest zinc miner, expects its output to grow in 2019/20 after a drop in the previous financial year.
Zinc prices hit four-month lows on Monday as investors fretted about rising supplies from top producer China, while industrial metals overall came under pressure from trade tensions between the United States and China.
Benchmark zinc on the London Metal Exchange ended down 1.0% at $2,575 a tonne. Earlier, prices of the metal used to galvanise steel touched $2,553, the lowest since Jan. 22. It is down about 9% so far in May.
“There was another wave of selling this morning. The idea of much higher zinc supplies in China in the second half has hit sentiment,” a zinc trader said.
“It looks like there isn’t going to be a resolution to the trade dispute any time soon, that uncertainty will keep up pressure on the base complex.”
ZINC: Analysts expect China’s zinc production to climb around 5% in May from April to above 560,000 tonnes. Higher numbers are expected in the second half as new capacity ramps up.
A Reuters survey published earlier in May shows analysts on average expect a surplus of 20,000 tonnes this year after years of deficits, in a market estimated around 14 million tonnes.
POSITIONS: “Speculative positioning in zinc as of last Thursday shifted from flat to a net short of 2.1% of open interest or 3,300 lots (82,500 tonnes),” Marex Spectron analysts said in a note. “Whilst relatively small, this is a level not seen since Dec. 2018”.
STOCKS: However, low stocks of zinc in LME-approved warehouses, at 104,850 tonnes from above 250,000 tonnes in August last year, and large holdings of LME warrants are fuelling nervousness about shortages on the LME market. MZNSTX-TOTAL <0#LME-WHL>
This can be seen in the premium or backwardation for the cash over the three-month contract which ended at a 20-year high $150.50 a tonne on Friday. MZN0-3
TRADE: No further trade talks between top Chinese and U.S. negotiators have been scheduled since the last round ended on May 10 – the same day Washington raised the tariff rate on $200 billion worth of Chinese products to 25% from 10%.
PRICES: Copper ended 0.4% down at $6,029 a tonne after earlier touching $6,004, its lowest since Jan. 29.
Aluminium lost 2.1% to $1,797.5, lead slipped 1.2% to $1,804, tin ceded 0.3% to $19,450.
Nickel was untraded at the close, but was 0.3% lower at $11,980 on the LME’s electronic system.
DEAL: Aluminium came under pressure after the United States on Friday struck deals to lift tariffs on steel and aluminium imports from Canada and Mexico.
Most of the impact is expected to be seen in the physical market premium — paid above the LME price — for aluminium consumers in the United States. Last week the premium was above $400 a tonne.
Zinc prices rose sharply in London and Shanghai in early trade on Tuesday, as investors worried about dwindling inventories of the metal used to galvanise steel. The London Metal Exchange reopened on Tuesday after the Spring bank holiday in the United Kingdom on Monday, which was also the Memorial Day holiday in the United States. FUNDAMENTALS * ZINC: Three-month LME zinc rose as much as 1.5% to $2,599 a tonne and stood at $2,580 as of 0132 GMT. The most-traded July zinc contract on the Shanghai Futures Exchange climbed as much as 2.4% to 20,795 yuan ($3,014.95) a tonne, its highest since April 4. * STOCKS: ShFE zinc stocks ZN-STX-SGH fell by 18.1% from the previous week to 56,320 tonnes, according to data released by the bourse on Friday. LME zinc inventories MZN-STOCKS fell for five straight days last week and stand at 102,600 tonnes. * SPREADS: The premium of cash LME zinc over the three-month contract CMZN0-3 hit $161 a tonne on Friday, the highest in 22 years, indicating tight near-term supply. * COPPER: LME copper rose 0.7% to $5,995 a tonne, while ShFE copper edged up 0.2% to 47,250 yuan a tonne. * COPPER: The head of state-run miner Codelco, the world's largest copper producer, said Chile's mining industry was increasingly held back by new environmental regulations and the low productivity of Chilean workers, local daily La Tercera reported on Monday. * COPPER: China's Yanggu Xiangguang Copper Co has restarted its 400,000 tonne per year copper smelter in Shandong province after an overhaul that lasted about 50 days, a company official said on Monday. * ZAMBIA: Vedanta Resources is open to dialogue with the Zambian government but will defend its legal rights and opposes the appointment of a provisional liquidator at its Konkola Copper Mines business, the company's CEO said on Monday. MARKETS NEWS * Asian shares tracked European gains, as relief over EU election results eased concerns about political difficulties in the bloc and merger news supported auto shares, although persistent concerns about trade capped regional sentiment.
Zinc prices fell to their lowest in two weeks on Thursday as rising Chinese production and a collapse in the premium for cash metal on the London Metal Exchange (LME) pointed to a better supplied market.
Benchmark zinc on the LME ended down 1% at $2,425 a tonne, within a whisker of last month’s level of $2,412, the lowest in 5-1/2 months.
The metal used to galvanize steel has tumbled more than 30% from a high early last year as a U.S.-China trade war weakened the demand outlook and traders braced for a surge of refined metal to end a supply shortfall.
Rising Chinese output, rumours that zinc is moving from Chinese bonded storehouses into the LME warehouse system and a big fall in the premium for LME cash zinc were pushing prices lower, Deutsche Bank analyst Nick Snowdon said.
“You could see more downside to the low $2,000s,” he said, adding that prices were unlikely to fall much lower because of the low level of warehouse stocks.
DEFICIT: Higher output by Chinese smelters is expected to end a deficit that according to the International Lead and Zinc Study Group (ILZSG) amounted to 97,000 tonnes during the first four months of this year.
CHINESE OUTPUT: Chinese refined zinc output at 480,000 tonnes was up 7.4% in May compared to the same month in 2018.
Global production of zinc is around 13.5 million tonnes a year.
SPREAD: The premium for cash zinc over the three-month contract on the LME fell to $9.50, down from more than $150 in May and the lowest since March, suggesting greater availability of nearby metal. MZN0-3
STOCKS: Zinc inventories in LME and Shanghai Futures Exchange (ShFE) warehouses fell in recent months to the lowest in more than a decade, but levels have begun to recover. MZNSTX-TOTAL ZN-STX-SGH
TRADE WAR: Top representatives of the United States and China are organizing a resumption of talks for next week to try to resolve a year-long trade war between the two countries, Trump administration officials said.
GLOBAL FACTORIES: Data this week showed factory activity weakening in major economies around the world.
U.S. ECONOMY: The United States added fewer jobs than expected in June and its trade deficit jumped in May, suggesting economic growth slowed sharply in the second quarter.
London zinc prices fell on Wednesday, ending a five-session streak of gains, after data showed a global zinc market deficit narrowed in May.
Three-month zinc on the London Metal Exchange (LME) fell 1.2% to $2,425 a tonne by 0210 GMT, after climbing 5% in the past five sessions.
The most-traded zinc contract on the Shanghai Futures Exchange (ShFE), however, rose 0.7% to 19,380 yuan ($2,817.23) a tonne, tracking gains on the LME in the previous session.
The global zinc market deficit narrowed to 27,200 tonnes in May from an upwardly revised deficit of 87,500 tonnes in April, data from the International Lead and Zinc Study Group (ILZSG) showed.
* ZINC STOCKS: Zinc inventories in LME-approved warehouses MZNSTX-TOTAL have risen around 60% since April when the stockpiles hit a record low, while stocks in warehouses tracked by ShFE ZN-STX-SGH have jumped 268% year-to-date.
* ZINC SPREAD: The premium of cash over three-month zinc contracts on the LME CMZN0-3 eased to $4 a tonne on Tuesday, from $12 in the previous session, indicating more nearby supplies.
* LEAD: The global lead market recorded a 13,400-tonne surplus in May after a deficit of 30,800 tonnes in April, data from the ILZSG showed.
* NICKEL: Kazakh entrepreneur Kenes Rakishev said on Tuesday he had sold his stake in gold miner Petropavlovsk and would invest the proceeds in a cobalt and nickel project he aims to list in Hong Kong.
* PERU COPPER: Peruvian President Martin Vizcarra rejected a demand from a regional governor on Tuesday to cancel a permit for Southern Copper Corp’s $1.4 billion Tia Maria copper mine project amid protests from local residents.
* TRADE DEAL: President Donald Trump said on Tuesday the United States still has a long way to go to conclude a trade deal with China but could impose tariffs on an additional $325 billion worth of Chinese goods if it needed to do so.
* PRICES: LME copper fell 0.6%, aluminium eased 0.4%, nickel fell 0.8% and tin edged down 0.3%. Shanghai copper eased 0.1%, aluminium dipped 0.1%, while nickel jumped 2.1%.
Belgium’s Nyrstar said on Monday it had shut down its zinc-lead smelter furnace in Port Pirie, Australia, after an incident in the second disruption at the plant this year.
An unidentified incident occurred in the hearth in the primary smelter and caused a forced shutdown of the plant with no injuries, Nyrstar said in a statement to Reuters. “Repairs will result in the (furnace) being down for a number of weeks and a number of options are being considered including a re-start of the sinter plant to maintain production,” the company said. Port Pirie produced 160,000 tonnes of lead in 2018, according to data on Nyrstar’s website. Nyrstar restarted production Port Pirie in late July after a nearly two-month shutdown because of an unplanned outage at the site’s blast furnace that disrupted its shipments to customers. Nyrstar lost 30,000 tonnes of lead metal due to the outage, the company said on July 19. Global trading house Trafigura took over the troubled smelter last month. (Reporting by Pratima Desai in LONDON and Melanie Burton in MELBOURNE; editing by Christian Schmollinger)
Copper slipped on Monday after weak Chinese data fuelled worries about demand, but lead and zinc hit multi-months peaks after a mine suspension.
China’s industrial production grew at the weakest pace in 17-1/2 years last month and fixed-asset investment in January-August increased at a slightly lower rate than expected, data showed.
China is the biggest user of copper, which is used widely in power and construction.
“It was definitely weaker than expected. Copper has rallied pretty decently over the past couple weeks, but this was a little reminder that the underlying fundamentals are still questionable,” said Colin Hamilton, director of commodities research at BMO Capital.
Chinese Premier Li Keqiang said it is “very difficult” for the world’s second-largest economy to keep growing at a rate of 6% or more, after a 6.3% expansion in the first half of the year.
Three-month copper on the London Metal Exchange (LME) slipped 1.8% to $5,870 a tonne in final open-outcry trading after hitting a 1-1/2-month high in the previous session.
At its peak on Friday, copper had rebounded 8% since touching a two-year low on Sept. 3.
Vedanta Resources said on Thursday it would shut its Skorpion zinc operations in Namibia from early November until the end of February 2020.
The company said in a statement the closure was due to technical problems which resulted in reduced ore production at the Skorpion site.
Skorpion expected to produce around 90,000 tonnes of zinc last year, according to Vedanta’s website.
The global zinc market is around 14 million tonnes a year.
Benchmark zinc on the London Metal Exchange was up 3.7% at $2,375 a tonne at 1543 GMT, outperforming other industrial metals.
Zinc treatment and refining charges are expected to stay at high levels due to rising mine supply from Australia and South Africa, Chinese smelters, overseas miners and traders said this week at an industry gathering in China.
Next year’s annual zinc TC/RC benchmark is expected to be higher than this year’s, which was agreed between Korea Zinc and Teck Resources at around $245 per tonne, but not quite as high as current spot levels of almost $300 per tonne, Duncan Hobbs, research director at trading house Concord Resources Ltd said.
“TCs are expected to remain high and annual benchmarks are going to be trending higher probably for the next few years,” Oliver Nugent, analyst at Citi in London said adding, “mine supply should be outpacing smelter capacity and rebuilding concentrate stocks for the next couple of years.”
He added that recent increases have been driven by smelter bottlenecks but going forward increased mine supply will be the predominant driver.
Wood Mackenzie expects zinc concentrate to remain in surplus in 2020, with around 1 million tonnes of annual capacity to be added by 2023. Last year’s global supply was just under 13 million tonnes.
A source with one trading house said Chinese zinc smelters have been offering TCs at around $300 for concentrate supply in the first quarter of 2020. But most traders said they were in no rush to make a deal ahead of more industry gatherings this month.
A Chinese smelter source said more mine supply will come online and smelter output will not improve much. But he said there was not much room for the TC to go higher.
The International Lead and Zinc Study Group will host a conference in Lisbon next week, before the flagship LME Week event takes place in London at the end of October.
Spot TCs, or fees that miners pay smelters to process zinc ore into refined metal, have climbed relentlessly in 2019 to an 11-year high of $290 a tonne, as fast-rising mine supply overwhelms limited smelting capacity.
The more than a decade-high TC “is a strong incentive for zinc smelters to produce as much metal as they can,” Hobbs said.
But most miners at the China Lead and Zinc Conference in Kunming this week said current TCs were tolerable provided zinc prices hold close to $2,500 a tonne and would not force them to close, although $2,000 would be a different matter, they noted.
“All of us are hurting at the moment. But these things come in cycles,” one miner said.
London Metal Exchange (LME) zinc hit a 2-1/2 month high of $2,441 a tonne on Tuesday amid low stockpiles and some smelter outages but are down 2% year-to-date and remain under pressure from the U.S.-China trade war.
Sherry Shen, a senior consultant at Wood Mackenzie, said that even at $2,200 a tonne next year, only around 6% of global zinc miners, accounting for some 700,000 tonnes of capacity, would fail to profit and potentially cut output.
If zinc falls to $1,900, those numbers would rise to 20%, or about 2 million tonnes capacity, Shen said.
But the current TC level of around $285 a tonne is already “terrible” for miner profitability, said Simon Aviles, a commercial adviser at Bolivian zinc miner Empresa Minera Sudamericana Andina.
“It’s like a shoebox. Only so much production will fit in. We miners have to compete with one another. The smelters know this so they just keep raising the TC,” Aviles told Reuters, adding the solution would be to “build more smelters”.
Zinc prices rose on Wednesday as available stocks in London Metal Exchange (LME) warehouses slipped to their lowest levels in more than two decades despite expectations of increased supply.
Copper also ticked higher after protests disrupted some supply in top producer Chile.
Benchmark zinc was up 0.2% at $2,473.50 a tonne at 1425 GMT, around the highest since July and up from a three-year low of $2,190 on Sept. 3.
“The fundamental story (with zinc) is that the transition to a surplus market keeps being pushed back,” ING analyst Wenyu Yao said. Before long, however, additional supply will come through and push prices lower, she added.
ZINC STOCKS: On-warrant inventories in LME-registered warehouses fell to 35,125 tonnes, the lowest since at least 1998. MZNSTX-TOTAL
SPREAD: Cash zinc traded at a $35 premium to three-month metal, up from around zero over July-September, suggesting lower availability of nearby material. MZN0-3
POSITIONING: Speculative positioning was largely flat after a bout of short covering, brokers Marex Spectron said.
FUNDAMENTALS: The global zinc market saw a 106,000-tonne shortfall over January-July, the International Lead and Zinc Study Group said this month.
COPPER: Benchmark copper was up 0.4% at $5,841 a tonne. Prices remain near last month’s two-year low of $5,518, however, with gains capped by concerns that weakening global growth will restrain demand.
CHILE DISRUPTION: Antofagasta warned that unrest could lower its output by about 5,000 tonnes, equivalent to less than 3% of third-quarter production.
Codelco said one of its mines was shut and operations at a smelter drastically reduced. Union workers at BHP’s Escondida copper mine downed tools on Tuesday.
FUNDAMENTALS: The International Copper Study Group said the market would return to a surplus of 281,000 tonnes in 2020 after a 320,000-tonne shortfall this year.
FREEPORT: Miner Freeport McMoRan said its copper output fell 14% in the third quarter.
NICKEL: LME nickel was 0.5% higher at $16,595 a tonne, with the premium for cash metal versus the three-month contract tumbling to $2 from more than $200 at the start of October, suggesting shortages of nearby material have eased. MNISTX-TOTAL MNI0-3
LME PROBE: The LME has asked members to report any unusual activity in nickel trading after prices lurched up and down in the wake of large transactions last week, sources said.
ALUMINIUM: Miner Rio Tinto flagged a possible pullback or closure of New Zealand’s Aluminium Smelter, citing weakness in the aluminium market and high energy costs.
Tajikistan cut its aluminium output growth target for this year to 5% from 20%, a government source said.
Producer Norsk Hydro said it expected global aluminium demand growth to hover around zero this year, down from 3.1% in 2018.
OTHER METALS: LME aluminium was up 0.6% at $1,729 a tonne, lead was down 0.4% at $2,209.50 and tin was 1.6% lower at $16,580.
Zinc prices climbed towards 4-month peaks on Monday as slumping stocks fuelled fears of shortages, while copper hovered near five-week highs on hopes of progress in trade talks between the United States and China.
Benchmark zinc on the London Metal Exchange was untraded in the closing rings, but was bid up 1.3% to $2,542 a tonne.
Prices of the metal used to galvanise steel earlier touched $2,549, moving back towards last week’s peak of $2,567.35, which was the highest since June 14.
“Visible zinc stocks are minimal, I can’t remember the last time they were so low,” a metal trader said. “Copper is looking at developments on the U.S-China trade front with optimism.”
Copper, used by investors as a gauge of economic health, was down 0.3% at $5,908 a tonne, having earlier touched a session high of $5,927.
STOCKS: Zinc inventories in London Metal Exchange-registered warehouses are at 57,775 tonnes. They fell to 50,425 tonnes in April, the lowest since the 1990s. MZN-STOCKS
Also supporting prices are cancelled warrants – metal earmarked for delivery and so no longer available to the market – at nearly 43%. MZNSTX-TOTAL.
SPREADS: Concern about the availability of zinc on the LME market has created a premium of $44 a tonne for the cash over the three-month contract, close to the $50 a tonne seen in September CMZN0-3.
BALANCE: Global zinc demand is estimated at around 14 million tonnes this year. Some analysts expect an annual deficit of around 200,000 tonnes.
“The slight resurgence of tightness in the ex-China zinc market is likely temporary and any macro-related risk-on rally is likely to present another opportunity to sell in to strength,” Citi analysts said in a note.
“For producers who missed an earlier rally cry to hedge, the next 3-6 months are likely to provide (another) chance.”
TECHNICALS: Zinc prices face heavy resistance at $2,545, where the 200-day moving average currently sits, followed by $2,575, the 50% Fibonacci retracement level of the April to September slide.
TRADE: U.S. and Chinese officials are “close to finalising” some parts of a trade agreement after high-level telephone discussions on Friday, the U.S. Trade Representative’s office and China’s Commerce Ministry said.
“A stuttering global industrial economy continues to weigh on many commodity prices,” analysts at BMO Capital Markets said in a note. “While government policy is increasingly supportive, weak manufacturing orders mean 2020 demand expectations have been lowered once more.”
INDONESIA: Nickel briefly reversed early losses after Indonesia’s nickel miners agreed to stop nickel ore exports immediately. Last month Jakarta brought forward a ban on shipments to January 2020 from 2022.
It was down 0.8% at $16,640.
PRICES: Aluminium was up 0.5% at $1,736 a tonne, while lead rose 0.6% to $2,236 and tin gained 0.3% to $16,725. (Reporting by Pratima Desai; Editing by Kirsten Donovan and Jan Harvey)
Zinc and lead are both in short supply on the London Metal Exchange (LME).
Headline zinc stocks of 53,875 tonnes are back at April levels, while “live” tonnage of 27,800 tonnes is the lowest it’s been in at least 20 years.
Lead stocks are a little higher at 70,075 tonnes but have failed significantly to rebuild from July’s decade low of 55,475 tonnes.
Unsurprisingly, both LME contracts are experiencing time-spread tightness.
Zinc closed last week with cash metal commanding a $61-per tonne premium over metal for three-month delivery. Lead’s front-month curve structure is also in backwardation to the tune of $7.25 at Friday’s close.
The sister metals have defied expectations of a shift into supply surplus throughout this year and they continue to do so.
Even though both are seeing flagging demand, particularly from the automotive sector, supply bottlenecks have kept each market in supply deficit this year, according to the International Lead and Zinc Study Group (ILZSG).
ZINC DEFICIT WIDENED
Indeed, ILZSG has just widened its expected 2019 zinc supply deficit to 178,000 tonnes from an assessment of 121,000 tonnes at the Group’s last meeting in May.
That’s despite a downgrade to demand, which is now expected to decline by 0.1%, largely due to weakness in Europe, where usage is forecast to contract by 3.7% this year.
Supply, though, just hasn’t come through in the way anticipated at the start of the year.
Back in May the Group was looking for world mine production to surge by 6.2% this year, laying the ground for a 3.6% increase in refined metal output.
Those forecasts have been slashed to just 2.0% and 2.5% respectively.
Mine supply has increased as expected in Australia, but the impact has been offset by sharp declines of 6.4% in Peru and 7.8% in the United States.
The anticipated rise in refined production has only really played out in China, where output is expected to lift by 7.1% this year.
Outside of China, smelter hits have caused a bottleneck in the supply chain.
European production will fall by 3.5% this year due to lower output at Nyrstar’s plants in France and the Netherlands, while the permanent closure of the 100,000-tonne per year Vladikavkaz smelter in Russia has blown a lasting hole in regional capacity.
A string of smaller smelter outages will also depress output in Australia, India and Canada, the ILZSG said.
LEAD FORECAST FLIPPED TO DEFICIT
The Group’s revisions to its May forecasts for the lead market are even more dramatic.
The global refined market was expected to register a supply-usage surplus of 71,000 tonnes this year but that has just been revised to a shortfall of 46,000 tonnes.
Lead too is expected to see a fall in demand this year, led by a 1.1% decline in China, which is seeing weakness in automotive production and “increased use of lithium-ion batteries in both the motorcycle and e-bike sectors and for Uninterruptable Power Supply (UPS) stationary backup systems,” according to ILZSG.
However, lead supply has misfired even more than zinc with the Group now forecasting global refined production to contract by 0.3% this year, compared with an expectation in May that it would grow by 2.5%.
The main culprit is Nyrstar’s Port Pirie lead smelter in Australia. The plant went down in May and following a restart was out of action again in August.
Canada’s Belledune smelter has also seen production hit by industrial action, while Glencore’s permanent closure of its Palpala plant in Argentina last year has served to reduce Latin American treatment capacity.
NARRATIVE BACK ON TRACK NEXT YEAR
While events this year confounded a market narrative of zinc and lead transitioning from supply deficit to surplus, ILZSG’s forecasts suggest the shift has simply been delayed not cancelled.
The Group is forecasting a zinc market surplus of 192,000 tonnes and a lead market surplus of 55,000 tonnes in 2020.
This year’s demand weakness is expected to fade with expectations that zinc usage will increase by 0.9% and lead by 0.8% next year.
But the delayed supply surge is expected finally to arrive with full impact next year.
Zinc mined and refined supply are forecast to rise by 4.7% and 3.7% respectively with lead mine supply up 3.9% and refined output up 1.7%.
This year’s smelter bottlenecks are expected largely to clear next year, although Port Pirie’s technical travails remain a key variable for lead’s supply chain.
Both zinc and lead prices have spent much of 2019 on the back foot with the market trading the elusive surplus story.
It’s only in the last couple of weeks that there’s been something of a collective double-take, primarily because visible exchange stocks have shown no sign of rebuilding.
LME three-month lead last week hit a year-to-date high of $2,265 per tonne, although it has since been knocked back to a current $2,160.
Zinc, meanwhile, has regained a toe-hold above the $2,500-per tonne level for the first time since June, currently trading around $2,530.
Further gains seem unlikely given the broader negativity in the industrial metals complex with traders eyeing the bearish combination of spreading factory weakness and the continued absence of any breakthrough in the Sino-U.S. trade dispute.
Rather, the tensions between expectation and reality are likely to continue playing out in the nearby time-spreads.
Zinc is particularly in focus, given the extremely low levels of LME on-warrant stocks, but a dominant position in the LME lead contract equivalent to over 90% of available inventory is also worth a keeping a close eye on. <0#LME-WHC>
It’s clear that consecutive years of deficit in both markets have severely depleted inventory, both on and off exchange, and that it will take time for the supply chain to refill.
The time-line for a return to surplus has already proved more elastic than anyone expected at the start of 2019. The latest numbers from ILZSG should serve as a warning that it could be a while yet before the transition becomes tangible in the form of rising exchange stocks.
Hidden zinc inventories are helping to keep stocks low in exchange-approved warehouses and prop up prices, but increasing production is due to hit the market in coming months.
Zinc CMZN3, mainly used for galvanizing steel, has been the best performer on the London Metal Exchange over the past three months, gaining 4.7% versus a 0.3% rise for copper CMCU3.
Prices have been supported as bottlenecks at smelters this year lasted longer than expected, putting a lid on refined output even as mine production has been growing.
This has been reflected in shortages outside of top consumer China and a slide in inventories in LME-approved warehouses MZNSTX-TOTAL, which have more than halved so far this year to 53,250 tonnes, the lowest in two decades.
Stocks in Shanghai Futures Exchange depots ZN-STX-SGH have declined by nearly half to 63,797 tonnes since mid-March.
“We’re in this lingering state of tightness,” said Oliver Nugent, analyst at Citigroup in London.
While smelters are still struggling with mediocre production outside of China, within the country output of refined zinc has been rebounding in recent months.
“There’s a real disparity. There is a loosening story that is already underway in China. It’s a timing question of how long that takes to knock on to ex-China and the LME,” Nugent said.
Refined zinc output in top metals consumer China surged 19% year-on-year in September as smelter bottlenecks have eased.
Smelters have also been taking advantage of strong zinc treatment and refining charges, which miners pay to smelters to process their ore concentrates into metal. Spot levels have soared this year AM-TC50-ZNCONto the highest in over a decade.
Higher Chinese production is not showing up in exchange warehouses partly because the additional output is being stashed away in private storage facilities, analysts and traders said.
“We’ve been told that the Chinese smelters are producing as much as they can and basically it’s going into off-warrant, private warehouse financing,” said Sucden Financial senior broker Liz Grant.
Warrants are ownership documents for metals stored in exchange warehouses.
“The two largest traders of zinc in the world also have an interest in zinc prices not being on the floor…It would make sense that if they hold stock for any reason, they don’t make it visible,” Macquarie analyst Vivienne Lloyd told a briefing.
Macquarie estimates that at the end of October there were 940,000 tonnes of “invisible” zinc stocks, consisting of inventories in non-exchange warehouses and in the supply chain.
That overwhelms the 117,047 tonnes in LME and ShFE warehouses.
Strong supplies within China have caused the physical zinc premium there to slide.
Rising output at new mines will eventually find its way to the market and pressure benchmark prices, according to consultancy CRU.
Vanessa Davidson, director of base metals research at CRU, told a presentation that about 900,000 tonnes of zinc were due to come online next year, boosting mine production by 7.3% to 13.37 million tonnes.
“We see that the increase in supply next year is both extreme and significant… prices will need to fall significantly from where they are today in order to encourage more price-sensitive cutbacks of production,” Davidson said.
CRU forecasts zinc to average $2,180 a ton next year, down 13% from the current level of $2,495, while Macquarie’s Lloyd sees prices bottoming out at $2,000-$2,100 going into 2020.
Zinc sank to its lowest in nearly three months on Monday and other industrial metals also posted losses as investors doubted that upbeat manufacturing data in China pointed to an economic recovery.
Factory activity in top metals consumer China expanded at the fastest rate in three years, a private sector survey showed on Monday, reinforcing strong government data released on Saturday.
But some analysts said the buoyant showing, especially for the Caixin/Markit manufacturing Purchasing Managers’ Index, may be influenced by one-off factors.
“A lot of people are doubting the veracity of the Caixin one. That’s a pretty dramatic turnaround, so there’s a degree of scepticism,” said Colin Hamilton, director of commodities research at BMO Capital in London.
“Normally the official numbers are above the Caixin one and for two or three months we’ve had it the other way around.”
There was also worry that the good data might undermine a U.S.-China trade deal.
“The problem America now faces is that China looks to be returning to growth despite the tariffs, which gives the upper hand to China,” Malcolm Freeman at Kingdom Futures said in a note.
“This may mean no trade deals are signed this year, which will be perceived as bearish.”
Benchmark zinc prices on the London Metal Exchange fell 1.3% to $2,243 a tonne in final open-outcry trading after touching $2,237, the lowest since Sept. 4.
* ZINC POSITION: The net speculative short position of LME zinc has risen to 14.7% of open interest, a level not seen since late September, Alastair Munro at broker Marex Spectron said in a note.
* NORSK HYDRO CUT: Norsk Hydro, one of the world’s biggest aluminium producers, plans to cut production by 20% at its majority-owned Slovalco plant in Slovakia, citing a weakening market.
“With a demand rebound unlikely near-term, supply cuts in excess of 1 million tonnes per annum are needed to prevent a drop to our bear case of $1,657/t in early 2020,” said Morgan Stanley analysts in a note.
LME aluminium rose 1.1% to close at $1,790 a tonne.
* ALUMINIUM STOCKS: The weak aluminium market has led to rising inventories. On-warrant LME stocks MALSTX-TOTAL, material not earmarked for delivery, reached 1,114,650 tonnes, the highest since Feb. 22, data showed on Monday.
They have shot up 42% over the past three weeks.
* COPPER CONTRACT: China’s Shanghai International Energy Exchange (INE) is preparing to launch a copper futures contract within the next year that will be open to domestic and foreign investors, according to two sources familiar with the plans.
* PRICES: LME three-month copper edged up 0.3% to end at $5,883 a tonne, lead dropped 1.6% to $1,906, the weakest since July 9, and tin slipped 0.03% to $16,490.
Nickel gained 0.4% to finish at $13,720, rebounding after touching $13,610, the weakest since July 16. (Reporting by Eric Onstad Editing by Christina Fincher and Jan Harvey)
Zinc prices fell in London and Shanghai in early Asian trade on Tuesday, as a rise in Chinese inventories stoked demand concerns and led investors to take up short positions on the metal used to galvanise steel. Social, or non-exchange, zinc stocks in China rose by more than 5,000 tonnes as of Dec. 23, Chinese brokerage Jinrui Futures said in a note, relieving some of the pressure on supply from low exchange inventories. FUNDAMENTALS * ZINC: Three-month zinc on the London Metal Exchange fell 0.2% to $2,285.50 as of 0233 GMT, after ending down 2.1% in the previous session. The most traded February zinc contract on the Shanghai Futures Exchange slumped 1.5% to 17,850 yuan ($2,545.20) a tonne. * TCs: Treatment charges for zinc concentrate in China AM-TC50-ZNCON have hit as high as $310 a tonne this month, the highest since June 2008 amid plentiful ore supply, incentivising smelters to keep producing metal. * COPPER: LME copper edged down 0.2% to $6,177.50 a tonne in quiet pre-holiday trade, while Shanghai copper inched up 0.1% to 49,080 yuan a tonne. * SCRAP: China's environment ministry has issued import quotas for 270,885 tonnes of high-grade copper scrap and 275,465 tonnes of aluminium scrap, the first batch for use in 2020. China's scrap metal imports in November rose by 6.3% from the previous month to 170,000 tonnes. [ * RARE EARTHS: Rare earths miner UCore Rare Metals Inc and manufacturer Materion Corp said on Monday they will form a consortium to jointly apply for U.S. military funding of a rare earths processing plant. * HOLIDAY: The London Metal Exchange will be closed on Wednesday and Thursday for the Christmas holiday. * For the top stories in metals and other news, click or MARKETS NEWS * The dollar traded little changed while equity markets added to a year-end rally, with both a gauge of stock performance worldwide and Wall Street hitting new highs amid renewed optimism over U.S.-China trade and growth prospects.
Zinc prices rose to two-month highs on Monday after a break of key technical levels triggered a flurry of buying and as the market worried about historically low inventories.
Benchmark zinc on the London Metal Exchange (LME) ended 0.6% up at $2,444 a tonne.
Prices of the metal used to galvanise steel earlier touched $2,448, the highest since Nov. 13 and a gain of more than 10% since early December.
“The 200-day moving average around $2,440 gave way and started the short-covering,” one zinc trader said, referring to the closing of bets on lower prices. “It does pave the way for $2,500-$2,550, but that may need a lot more momentum.”
TECHNICALS: Strong resistance is seen at $2,480, a Fibonacci retracement level, while any reversal of the uptrend will only see support kick in at about $2,350, where the 21, 50 and 100-day moving averages are converging.
STOCKS: Stocks of zinc in LME-approved warehouses are close to 20-year lows at about 50,000 tonnes, having been on a downtrend since October 2015.
Visible inventories – including those on the LME, in warehouses monitored by the Shanghai Futures Exchange and those held by producers – are estimated at about 1.1 million tonnes.
That number is also very low, equating to about 30 days of global consumption rather than normal 50 days.
Global consumption is estimated at 14 million tonnes this year.
DEMAND: The China Iron and Steel Association recently forecast Chinese steel demand of about 890 million tonnes for 2020, up 2% from 2019.
SPREADS: Worries about nearby availability of zinc on the LME market have pushed cash metal to a premium of nearly $20 a tonne over the three-month contract, having been at a discount in December.
CHINA: Prices of industrial metals overall were supported by expectations of stronger demand from top consumer China, where data shows growth and demand stabilising, and optimism about improving U.S-China trade relations.
Chinese industrial output in December rose 6.9% from a year earlier, its strongest growth in nine months and above an expected 5.9%. Fixed-asset investment rose 5.4% for the full year, but growth had plumbed record lows in the autumn.
“We see scope for stabilisation in China and a de-escalation of the trade dispute,” Bank of America Merrill Lynch analysts said in a note, adding that this and a lack of mine supply growth is likely to support copper.
OTHER METALS: Copper closed 0.2% down at $6,259 a tonne, aluminium was up 0.4% at $1,812, lead lost 0.8% to $1,961, tin gained 0.2% to $17,850 and nickel added 0.8% to $14,025. (Reporting by Pratima Desai Editing by Kirsten Donovan and David Goodman)
Zinc prices lurched on Monday to their lowest since July 2016 after a surge in inventories and worries over demand in China as cases of the coronavirus grow in number.
Zinc stocks in warehouses certified by the London Metal Exchange (LME) hit their lowest in nearly three decades last week, but analysts said this was deceptive because a lot of metal was being held in other depots.
Annual contract negotiations had constrained metal flows but those have now been concluded, said Oliver Nugent, an analyst at Citigroup in London.
“Metal that was being held back before contract negotiations were finished is now coming on the market and, combining with weakness in Chinese import orders, that’s putting pressure on LME prices,” he said.
Three-month LME zinc slipped 0.5% to $2,135 a tonne in final open-outcry trading after hitting $2,117, its lowest since July 8, 2016.
With the coronavirus death toll above 900, the World Health Organization said the number of cases outside China could be “the tip of the iceberg”.
Citibank has become more cautious about the impact of the virus on demand in China, the world top consumer of metals, Nugent said.
“If you tally up the provinces that so far show the largest amount of cases, the potential demand hit is really quite severe. We calculate that the seven worst provinces have about 40% of GDP, 40% of property new starts and 70% of air conditioner production.”
Air conditioning units require large amounts of copper.
* ZINC STOCKS: LME zinc inventories MZNSTX-TOTAL shot up on Monday to 71,150 tonnes, the highest since August last year, bringing the gains over the past week to 43%.
Stocks in warehouses monitored by the Shanghai Futures Exchange nearly doubled to 97,922 tonnes over two weeks, it said on Friday.
* ZINC SPREAD: The discount of cash LME zinc to the three-month contract CMZN0-3 rose to $4.50 a tonne, its highest since last August and compared with a premium of $23.75 about three weeks ago. This indicates a rise in supplies of metal in the LME system.
* COPPER: LME copper edged up 0.1% to finish at $5,667 a tonne, though Nugent expects further losses. Citibank forecasts that copper will touch a low of $5,300 during the first quarter before recovering later in the year.
* COPPER CHARGES: Spot charges for processing copper concentrate in China have risen to their highest in eight months owing to the coronavirus outbreak.
* LEAD: LME lead shed 1.2% to close at $1,796, its lowest since June 3 last year.
The net speculative short position of LME lead has grown to 3.4% of open interest, though this is modest compared with last year’s peak short of 27%, Alastair Munro at broker Marex Spectron said in a note.
* PRICES: LME aluminium dropped 1.4% to close at $1,702 a tonne, nickel gained 0.9% to $12,885 and tin was up 0.9% at $16,325.
Henan Yuguang Gold and Lead , one of China’s biggest lead and zinc producers, has cut zinc output by 50% amid the coronavirus outbreak in the country, a company executive said on Thursday.
Yuguang on Wednesday closed half of its 300,000 tonnes per year zinc smelting capacity, mostly because the company is unable to shift high inventories of byproduct sulphuric acid, sales director Li Xiaodong said.
Shrinking demand for zinc, used to galvanise steel, was another factor behind the move, said Li, who added that Yuguang’s lead and copper production was still “holding up.”
He said they was no need for the smelter to declare force majeure on its supply contracts. Companies invoke force majeure when they cannot meet their contractual obligations because of circumstances beyond their control.
Yuguang is based in central China’s Henan province, which borders virus epicentre Hubei to the north. It has annual smelting capacity of 400,000 tonnes of lead and 150,000 tonnes of copper in the city of Jiyuan.
Smelters in China, the world’s top metals consumer, have been unable to sell off their high sulphuric acid inventories due to transport curbs imposed to contain the spread of the virus. Widespread factory closures have also reduced demand for sulphuric acid.
Prices for zinc were up 0.5% on the London Metal Exchange at $2,158 a tonne as of 0652 GMT but are down 5% so far in 2020 on concerns the virus will sharply reduce economic growth and hurt demand for industrial metals.
* Spot treatment charges (TCs) for zinc concentrate AM-TC50-ZNCON in China have fallen for the first time in almost two years, data from industry pricing and information provider Asian Metal shows, indicating a slight tightening of supply
* The charges – paid by miners to smelters to process zinc concentrate into refined metal – fell to $300 a tonne on March 2, down from an 11-year high of $305 a tonne
* The last time TCs dropped was on March 12, 2018, to just $15 a tonne. They have risen since then as abundant mine supply overwhelmed limited zinc smelting capacity
* Canadian miner Teck Resources and smelter Korea Zinc Inc have yet to announce a settlement on a TC benchmark for 2020
* China is the world’s biggest consumer of zinc, a metal used to galvanise steel; its mines are under cost pressure at current zinc prices, research house Antaike said on Monday, raising the prospect of production cuts
* Three-month zinc on the London Metal Exchange sank to $1,970 a tonne on Friday, its lowest since June 2016, as weak demand amid the coronavirus outbreak pushes inventories higher. However, prices have rebounded somewhat since then and risen 0.7% to $2,038 on Tuesday.
The spread of the coronavirus has hit the entire London Metal Exchange (LME) base metals complex as fears grow over the demand shock travelling out from China.
Zinc has been hit the hardest of all.
At a current $2,010 per tonne, the London three-month zinc price is down by 13% on the start of January, the weakest performance in a weak pack.
Zinc touched a near four-year low of $1,970 on Feb. 28 and has struggled to stage a convincing recovery over the course of this week.
Funds have been piling into zinc on the short side. LME broker Marex Spectron estimates net speculative short positioning reached 32% of LME open interest on Tuesday, the largest collective bear bet since November 2015, when it peaked at 38% of open interest.
Meanwhile, in China the market “is running record shorts” on the Shanghai Futures Exchange (ShFE) zinc contract, Marex said.
Zinc’s problem is that the coronavirus has darkened further an already bearish outlook.
SHANGHAI STOCKS SURGE
Stocks of zinc registered with the ShFE have mushroomed from 28,054 tonnes at the end of December to 162,402 tonnes.
Inventory build over China’s new year holiday period is normal. The scale of this year’s build isn’t normal. It already exceeds the peak seasonal increases of 104,000 tonnes in 2019 and 91,000 tonnes in 2018.
Quarantine and restrictions on travel have worked to slow the post-holiday return to work, disrupting the zinc value chain in China.
Moreover, zinc is particularly exposed to the economic impact of the virus via its use in galvanised steel in the automotive and construction sectors.
China’s giant automotive market was already struggling before the coronavirus. Now it is collapsing.
Passenger car retail sales in China fell 80% in February because of the coronavirus epidemic, according to the China Passenger Car Association.
Globalised automotive supply chains mean that this is not just a Chinese problem but could affect other countries’ automotive output.
An UNCTAD report this week cited carmaker Honda as saying it would reduce vehicle output at two of its domestic plants in Japan’s Saitama Prefecture for a week or so in March due to concerns about parts supply from China.
The United Nations agency estimates a shortage of Chinese components caused a $50 billion fall in global exports last month, with the automotive industry one of the most affected.
Property sales in China have also collapsed, which may affect the sector’s ability to maintain construction and completion rates. That hits zinc due to its use in white household goods.
Some mitigation to this demand shock has come from disruption to China’s giant zinc production sector.
Henan Yuguang Gold and Lead, one of China’s biggest zinc and lead producers, has cut zinc output by 50%, or around 150,000 tonnes per year, because it has been unable to sell the sulphuric acid generated as a by-product of the smelting process.
Others have reduced operating rates or brought forward planned maintenance work to offset logjammed logistics affecting both their raw material and product chains.
The build in Shanghai stocks would probably be even more massive were it not for this supply-side offset.
ACCELERATING THE BEAR NARRATIVE
Unfortunately for the zinc price, China’s producers are likely to return to normal operations before the downstream sector, meaning further increases in both visible exchange and off-market inventory in the country.
The big commodity banks have had it in for zinc for many months basis a storyline of a market transitioning from a period of chronic mine supply shortfall to one of surplus.
This process has already played out in the raw materials segment of the zinc supply chain, with smelters enjoying treatment charges of over $300 per tonne in a saturated zinc concentrates market.
What the bears have been waiting for is tangible evidence that the raw materials surplus is travelling down the value chain to become metal surplus.
With non-Chinese smelter capacity constrained, all eyes were on Chinese producers to start lifting run-rates, which they did aggressively over the back end of 2019.
Inventory build in China was expected this year, but the coronavirus demand shock is now accelerating the process – witness the ballooning stocks on the Shanghai exchange.
So far, at least, the surplus is stuck in China behind the country’s export tariffs.
The last chapter of zinc’s bear story, the move to visible surplus outside of China, is still to play out.
LME STOCKS LOW
There has been only a modest rise in stocks of zinc held by the LME.
A flurry of deliveries onto LME warrant in February lifted headline stocks from 51,200 tonnes at the start of the year to the 75,000-tonne level.
But since then stocks have plateaued, even while available tonnage has edged lower due to a steady trickle of cancellations as metal is taken off-warrant prior to physical load-out.
These are still ultra-low exchange stock levels by any historical yardstick.
But the LME zinc spread structure has loosened dramatically over the last couple of weeks, the benchmark cash-to-three months spread CMZN0-3 flipping from a backwardation of over $20 in January to a contango of $19.50 per tonne as of Thursday’s closing valuations.
The spread is signalling there is ample metal available, even if it is not evident from the exchange’s own registered stock levels.
All the funds betting on lower zinc prices better hope this is a true signal rather than a hall-of-mirrors LME stocks reflection.
They have already paid the price several times for getting their bear timing wrong in the zinc market, with spreads flaring out as shorts rolled positions in the confines of limited LME stocks availability.
There are a lot of shorts in London. There is still very low stocks cover. The surplus is building in China, but until it becomes evident elsewhere, bears could yet be caught out again.
Vedanta Zinc International, a unit of diversified miner Vedanta Resources, said on Monday it would suspend operations at its Skorpion Zinc mine and refinery in Namibia by the end of April.
Vedanta said the decision to place Skorpion Zinc on care and maintenance, which means operations stop but are kept in a condition to resume in future, was taken because of pit failures that had paralysed a significant portion of the open-cast mine.
The failures, the latest of which occurred in January, resulted in an ore gap of more than 10 months, the company said, adding that further technical studies had indicated the existence of similar failures at depth.
Roughly 1,500 employees in the southern African country will be affected by the suspension in operations.
“The decision has been taken to cease all mining operations while studies continue to look at feasible ways to make the pit safe for mining options, which would allow for the extraction of the remainder of the accessible ore,” the statement said.
Vedanta said last year it would shut Skorpion Zinc for four months.
Skorpion Zinc expected to produce 90,000 tonnes of the metal in 2018, rising to around 130,000 tonnes in 2020, according to Vedanta’s website. The global zinc market is around 14 million tonnes a year.
Spot treatment charges (TCs) for zinc concentrate in China have fallen to a one-year low on tightening supply as mines around the world shut amid government-enacted measures to contain the coronavirus pandemic.
The charges AM-TC50-ZNCON, paid by zinc miners to smelters to process concentrate into refined metal on short-term contracts, slipped to $255 a tonne on Tuesday, the lowest since April 16, 2019, according to industry pricing and information provider Asian Metal.
TCs fall when mine supply tightens and smelters have to compete harder to get concentrate to process. The charges rise when supply is abundant and mines have to offer more to get smelters to take their material.
“The concentrate supply is tight now,” said CRU Group analyst Dina Yu. “The rapid decline of TCs reflected the worries for the concentrate supply outside of China.”
The Antamina zinc mine in Peru – one of the largest in the world and co-owned by BHP Group, Glencore PLC and Teck Resources – is halting operations for about two weeks.
Production at Nexa Resources’ Cerro Lindo, Atacocha and El Porvenir mines in Peru were also suspended last month.
Peru, a major zinc producer and one of the top suppliers to Chinese smelters, has been in lockdown since March to contain the virus.
Current spot TCs are down 16% from an 11-year high of $305 at the end of February, and 15% below the annual TC benchmark reported by Fastmarkets of $299.75 a tonne for 2020 agreed by Korea Zinc and Teck Resources.
A China-based trader said he had heard of recent spot deals below $200 a tonne.
The lower concentrate supply could lead to 160,000-170,000 tonnes of annual refined zinc output being cut in China from now until the end of the year, or about 2.5%-2.7% of China’s 2020 projected output, CRU’s Yu said.
Benchmark three-month zinc prices on the London Metal Exchange have risen some 15% since March 19, when the contract hit a more than four-year low of $1,674.85 a tonne.
A Singapore-based metal trader said he had noticed a pick-up in demand from the infrastructure sector in China.
Another base metals trader with a trading house said the concentrate shortage should only give zinc prices a temporary lift due to a subdued long-term demand outlook.
Yu said the impact on supply is less than on the demand side in China’s overseas markets.
“The increase in demand from (China’s) infrastructure projects may be offset by the decline in the worsening export markets,” she said.
Collapsing demand for zinc caused by the novel coronavirus will swamp supply cuts from major producers Peru and India this year and leave the market with a massive surplus that will weigh on prices of the material used to galvanise steel.
The coronavirus, which has infected nearly 2 million people globally, has roiled global markets and hit demand from zinc-intensive industries such as construction and transport.
This has pushed benchmark zinc prices down about 18% this year to around $1,920 per tonne.
“With zinc you have a big demand problem and unless you see far more cuts in supply we are still expecting a healthy surplus this year,” said Colin Hamilton, analyst at BMO Capital Markets.
Hamilton said zinc was currently at levels that would likely force more supply out of the market.
BMO estimates global zinc demand will fall by about 6% this year compared to a roughly flat year in 2019. This assumes a recovery in the global economy in the second half of the year, Hamilton said.
It forecasts a 335,000-tonne surplus in the 14-million-tonne zinc market this year, up from a previous estimate of 150,000 tonnes. The new forecast is in line with expectations in a Reuters poll.
Governments around the world have imposed lockdowns and closed non-essential businesses such as mining to slow the spread of the coronavirus.
Peru and Mexico, which together account for 16% of global zinc mine supply, have seen mines including BHP and Teck Resource’s Antamina and Newmont-Goldcorp’s Penasquito mines temporarily close.
Nexa Resources also shuttered three zinc mines in Peru, while Sumitomo’s San Cristobal in Bolivia is closed.
Hindustan Zinc’s operations in India, which produces about a million tonnes a year, are ramping up operations after shuttering for a few weeks, a company spokesman said.
Tighter mine supply has pushed spot treatment charges, which are paid by miners to smelters to turn ore into metal, in China to a one-year low of $255 a tonne from levels near $300 a tonne earlier this year AM-TC50-ZNCON.
A shortage of concentrates from local Chinese mines is also putting pressure on smelter margins, raising the chances of output cuts, said CRU senior base metals analyst Paul Wiggers De Vries.
Tumbling zinc prices have put miners’ margins under pressure.
Citi estimates that about 25% of zinc miners are loss-making at current prices and expect about 800,000 tonnes is at risk of closure from the second half of this year.
“At these levels, either you are going to see a big player make proactive cuts to supply because of margins or you are going to see smaller miners forced out,” said Citi analyst Oliver Nugent.
On-exchange inventories point to a well-supplied market, with stocks in China surging in middle of March to over 169,000 tonnes before easing to about 158,000 tonnes last week.
“So far, hopes for zinc are pinned on infrastructure investment, but demand growth will still be outpaced by supply this year, leading to a market in surplus,” said ING analyst Wenyu Yao.
Government restrictions to slow the spread of the coronavirus outbreak have forced the closure of zinc and lead operations, mainly in South America, a major producer.
The shutdowns have raised expectations for a larger zinc surplus this year. Lead, mined alongside zinc which is used to galvanise steel, has also been hit by smelter shut downs.
A Reuters survey in April pegged this year’s zinc surplus at 335,000 tonnes, three times the 108,000-tonne excess expected in a January survey, while Refinitiv estimates the pandemic will reduce previously expected output by around 2%.
Below is a list of closures, suspensions and disruptions to zinc and lead operations due to the coronavirus outbreak.
April 14 – Newmont shuts its Peñasquito mine in Mexico. The operation, which primarily mines gold and silver, produced about 84,000 tonnes of zinc and 48,987 tonnes of lead last year.
April 13 – BHP and Teck Resources’ Antamina mine in Peru shuts for two weeks. The operation, which produces zinc as a byproduct, was expected to churn out about 500,000 tonnes of zinc this year.
On Wednesday, the mine said a date for a restart was uncertain.
March 26 – Glencore shuts its Matagami operation in Canada and says it could reopen before May 4. The operation produced 43,800 tonnes of zinc in 2019.
March 26 – Vedanta places its South African zinc operations including Gamsberg and Black Mountain mine under care and maintenance.
March 30 – Vedanta announces plans to shut its Skorpion zinc mine and refinery in Namibia by the end of April due to operational issues.
All three operations were set to produce at least 280,000 tonnes of zinc metal in the company’s financial year ending in March 2020.
March 26 – Recylex shuts its Weser-Metall lead production plant in Germany. It produces 130,000 tonnes of lead annually.
March 26 – Sumitomo Corporation suspends operations at San Cristobal mine in Bolivia.
March 24 – Hindustan Zinc Ltd halts all operations in India for a week.
March 18 – Nexa Resources temporarily closes its Cerro Lindo, Atacocha and El Porvenir mines in Peru. The mines produced a combined 198,000 tonnes of zinc and 45,000 tonnes of lead in 2019.
Feb 13 – Henan Yuguang Gold and Lead cuts output at its 300,000 tonne per year zinc smelter by 50%.
German zinc producer Metallwerk Dinslaken (MWD) said on Tuesday it will close permanently because of the economic fallout of the coronavirus crisis.
The company produces about 25,000 tonnes annually of secondary zinc and zinc alloys from scrap at its plant in Dinslaken and some 41 jobs will be lost.
The coronavirus shutdowns have greatly reduced availability of zinc scrap while zinc customers, especially in Italy, have cut zinc purchases, said a spokesman.
“We had to react because both raw material supplies and demand have come to a stop because of the coronavirus crisis,” he said.
Existing contracts will be completed and the company then shut down, he said.
China’s coal mining hub of Shanxi province aims to halve its coal-washing capacity to 1.8 billion tonnes a year and reduce the number of plants involved in the process to 1,200 by end-September, the area’s energy administration said on Thursday.
Shanxi pledged last year to reduce excessive capacity in the coal-washing industry and to shut plants that failed to meet tougher environmental standards. The washing process removes sulphur and other impurities from coal with water and chemicals before it is burned in power plants.
Shanxi, China’s second-biggest coal-mining province by output, had 2,704 coal-washing and preparation plants with a total annual capacity of 3.84 billion tonnes at end-2019.
At least 80% of the coal mined in Shanxi will have to be washed before use by the end of 2020 to improve coal quality and reduce toxic emissions, the provincial energy administration said in a statement.
The province also said it would close small-sized washing plants with capacities of less than 1.2 million tonnes a year by the end of this year.
The Shanxi energy administration urged city governments to tighten their scrutiny of environmental certificates at the washing companies that are allowed to operate.
“Less than a third of the coal-washing companies that local authorities have given green lights have actually met the environmental standards and acquire legal land-use rights,” said the energy administration in its statement.
China produced 3.75 billion tonnes of coal in 2019, with about a quarter of that coming from Shanxi province.
As the sun sank over a vast opencast coal mine in eastern Serbia earlier this month, a small crane eased the front half of a Roman ship from the steep sides of the pit.
An excavator cutting through the coal rich soil had pulled out some muddy timber weeks before, but coronavirus restrictions had meant the retrieval had to wait.
The ship was part of Viminacium, a sprawling Roman city of 45,000 people with a hippodrome, fortifications, a forum, palace, temples, amphitheatre, aqueducts, baths and workshops.
Lead archaeologist Miomir Korac said the vessel dated from the 3rd century AD when Viminacium was the capital of the Roman province of Moesia Superior and near a tributary of the Danube river.
“A Roman (river) fleet was based here to defend this region from barbarian invasions,” he told Reuters. “Such findings of Roman ships are really rare, especially in such a good condition where one could see how the boat was built.”
The ship originally measured 19 meters. It had a flat bottom, six pairs of oars and fittings for a triangular sail. The nine-metre front section had thick wooden sides and was discovered along with the remains of two smaller boats.
It will eventually go on display with some of tens of thousands of other artefacts unearthed from the site near the town of Kostolac, some 70 km (45 miles) east of Belgrade.
They include golden tiles, jade sculptures, mosaics and frescos, along with 14,000 tombs and the remains of three mammoths. The archaeologists are now working on what they believe to be the headquarters of a Roman general.
Excavations of Viminacium have been going on since 1882, but the archaeologists estimate that they have only covered 4% of the site, which they say is 450 hectares – bigger than New York’s Central Park – and rare in not being buried under a modern city.
Coal India’s sales fell 23.3% in May as utilities refrained from purchases amid record stockpiles and tepid demand because of a nationwide lockdown to curb the spread of the coronavirus.
Offtake by customers, such as power generators, fell to 39.95 million tonnes in May, down 23.3% year on year, though that represented a slight improvement from the 25.5% fall in April. May production fell 11.3% to 41.43 million tonnes, compared with a 10.9% fall the previous month.
More than three quarters of the electricity generated in India is derived from coal, with Coal India – the world’s largest coal miner – accounting for more than four fifths of India’s domestic production.
Power generation fell 14.3% in May and demand for the current financial year is expected to fall for the first time in at least 36 years.
India has also ramped up electricity generation from non-fossil fuel sources at the expense of coal-fired generation over the past two months, further dampening coal demand.
State-run Coal India and the federal coal ministry have been pushing electricity generators to keep buying coal even though utilities’ stocks and miners’ inventories are at record highs.
China’s coal imports in May fell nearly 20% compared with a year earlier even as demand recovered at power plants and industrial users, customs data showed on Sunday.
Analysts and industrial participants had expected China to tighten coal import rules in the second half of 2020 to support domestic miners, and imports starting in July may drop by as much as a quarter from the corresponding 2019 period.
Sunday’s data showed the country imported 22.06 million tonnes of coal last month, according to the General Administration of Customs released on Sunday. That compares with 30.95 million tonnes in April and 27.47 million tonnes in May 2019.
In the first five months of this year, China brought in 148.71 million tonnes of the fuel, up 16.8% from the same period last year.
Electricity consumption has been rising among both industrial and residential users as firms are ramping up production amid the economic recovery after the loosening of restrictions to curb the coronavirus outbreak, while households started to crank up their air conditioning because of warmer weather.
Curtailed hydropower generation, alongside falling water stocks at major reservoirs in the country, also shored up coal demand.
Average daily coal usage at China’s six major coal-fired utilities in coastal regions reached about 628,500 tonnes in May, which is 15% higher than in April and also 7.7% more than a year earlier, according to information from financial data provider Wind.
China aims to cap coal-fired power capacity at 1,100 gigawatts (GW) and the number of coal mines at 5,000 by the end of 2020, the state planner said on Thursday, keeping up efforts to ease overcapacity in industry and boost consumption of clean energy.
The world’s top consumer of coal had 104 GW of installed coal-fired power capacity and 5,268 coal mines nationwide by 2019.
“(China) will eliminate outdated and unqualified coal-fired power units…(and) will approve new coal-fired power projects orderly and moderately based on needs,” the National Development and Reform Commission (NDRC) said in a statement.
Researchers had feared China might struggle to meet climate pledges this year as it turns to heavy industry and carbon-intensive projects to shore up its coronavirus-stricken economy.
China will continue to support renewable energy development providing that electricity generated from renewable sources could be absorbed by grids, the state planner added.
It aims for total installed capacity of 340 GW of conventional hydropower, with installed capacity of both wind and solar power to reach about 240 GW by the end of the year.
However, about 4% of the electricity generated by wind farms and 2% by solar stations did not connect to China’s grid last year, thanks to its insufficient power carrying capacity, data from the National Energy Administration (NEA) shows.
To push local grid firms to prioritise purchase of clean sources, the agency set quotas early this month for each province’s minimum consumption of renewable electricity in 2020. (Reporting by Muyu Xu and David Stanway; Editing by Clarence Fernandez)
South African coal miner Exxaro Resources said on Thursday that it expects a slight fall in half yearly total coal production and sales volumes amid subdued demand on the back of COVID-19-fuelled lockdown measures. Exxaro said it expects half-yearly coal production and sales volumes to fall by 1% and 2%, respectively, and anticipates 2020 capital expenditure to be 15% lower than the outlook provided in March.
India’s private companies could start developing coal mines with an annual capacity of 15 million tonnes by the end of March, the country’s coal minister told Reuters, a move that would end the near-monopoly of state-run Coal India (COAL.NS).
Prime Minister Narendra Modi this month officially launched the auction of 41 coal mines to companies including those in the private sector, with an annual production capacity that is nearly one third of national total output.
“This year by end of March, if everything goes well, 15 million tonnes we will start this year,” India’s Coal Minister Pralhad Joshi told Reuters in a telephone interview late on Tuesday.
India’s consumption of coal fell 3.3% to 958 million tonnes in the year ended March 2020, and is expected to fall further this fiscal year due to the coronavirus, Joshi said.
Some analysts expect coal demand to be tepid, amid increased adoption of renewable energy in electricity generation.
Ratings agency Moody’s Indian unit ICRA said on Tuesday it expects domestic coal demand is estimated to grow at 2.9% between fiscal years 2021 and 2027, nearly half the rate seen in the preceding seven years.
However, Joshi expects demand to bounce back.
“We have to be prepared for a national coal consumption of 1,300-1,400 million tonnes of coal by 2023-24 including coking coal,” he said, adding he expected Coal India to produce 1 billion tonnes and the private sector to account for the rest.
India, the world’s second largest consumer and producer of the fuel, and saw imports rise nearly 7% this year to 251 million tonnes, with production falling for the first time in over two decades.