Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Winter Park, Florida 21/12/2015 - For years, I've gone to the International Zinc Association (IZA) conference in February and heard the same speech given over and over by company executives and analysts.
They all would basically say: "Look at all these mine closures that are only months away. This HAS to be the year where zinc mining gap becomes real. It's going to happen - just you wait."
This hopeful sermon was preached in Palm Springs in 2012 and then repeated in Cancun and Dana Point and again this year in Orlando.
Well, the wait is finally over. We will look back at December 7, 2015, as the specific date when the zinc market made the leap from surplus to deficit.
That was the day that Minerals and Metals Group (MMG) shipped the final tonnages of zinc concentrate from the Century mine in Australia. During its 16-year life, this was the largest zinc mine in the world, boasting annual production of around 450,000 tonnes per year.
Century's concentrates were prized for their easily smeltable low-iron/high zinc content and are quite difficult to replace. Bon voyage, Century, you will be missed.
This was obviously a well-telegraphed event and it isn't the only relevant supply-side news in marketplace. Elsewhere, Chinese zinc smelters have collectively agreed to slash output by around 500,000 tonnes next year, while other major producers such as Glencore and Nyrstar have announced curtailments of their own.
But I would argue that Century's final journey on the high seas is the tipping point. The slightest push, in just the right place, that will come to define the zinc market for the next several years.
Author Malcolm Gladwell describes a tipping point as that "magic moment when an idea, trend, or social behaviour crosses a threshold, tips, and spreads like wildfire".
This definition applies here. In just the past two weeks, the changes in fundamentals, pricing and market psychology have been shockingly evident.
Spot zinc concentrate treatment charges (TCs) for standard-grade zinc concentrate plummeted by $30 per tonne or 17 percent in a single week - they now stand at $150-165 per tonne.
"The spot market has dramatically changed and is still shifting," one mining source told FastMarkets recently.
The transformation can also be seen in broader refined zinc supply/demand balance. International Lead and Zinc Study Group (ILZSG) data shows that the global market moved into a deficit of 15,000 tonnes in October.
This is a sea-change from the rest of the year - the market was oversupplied by 213,000 tonnes in the January-October period.
"Given supply responses and mine closures, we expect monthly deficits to grow," FastMarkets' William Adams noted. "Indeed, treatment charges are starting to fall, which is a sign that smelters are getting worried about mine supply. This may be an early wake-up call for the zinc market."
Meanwhile, Macquarie predicts that mine closures have been more aggressive than previously expected – the bank predicts that there will be a 433,000-tonne deficit in concentrates in 2016 followed by an "extreme" shortage of concentrates and refined metal in 2017.
All of this adds up to miners holding the upper hand going into annual contract negotiations at the IZA conference that will be held two months from now in Arizona.
For 2015, annual TCs for zinc concentrate settled at a benchmark level of $245 per tonne, up almost 10 percent on $223 agreed for 2014 contracts and the highest since 2010, reflecting the oversupply of zinc concentrates this year.
For next year, it's a certainty that TCs will come down as the concentrate market moves into a deficit. For the past several months, miners have suggested that the benchmark will settle around $215-$220 per tonne.
But a good argument could be made that the sharp movement in spot prices over the past couple days changes the maths. A sub-$200 benchmark is now on the table.
As well, three-month zinc on the LME is still struggling at $1,528 per tonne, which is not far from the six-year low of $1,474 reached earlier this month. Given the looming tightness in the concentrates market, these historically low refined prices are unsustainable in the long term.
Zinc prices could be slow to react because there is relatively weak global end-market demand and high warehouse inventories. But the constrained upstream supply/demand dynamics clearly dictate higher prices by the second half of 2016.
(Editing by Mark Shaw)