London 06/01/2016 - The steep decline in zinc concentrate treatment charges (TCs) early in December appears to have stalled this year, with the market largely returning to relative normality following a rush of spot activity last month.
Zinc TCs, the discount on refined prices miners grant to smelters to cover the cost of turning concentrate into metal, were quoted at $160-175 per tonne on a cost, insurance and freight (CIF) basis for delivery to Chinese ports, up from $150-165 last month.
"Zinc concentrate has been declining since late November but the trend seems to have stopped at the moment, with the TC around $160-170," a Chinese trader said.
Last month, TCs fell sharply when the market rushed to replace tonnages lost from mining outages including those from the Century mine, creating tightness in the market.
One of the major catalysts behind the lower numbers in December was probably that material was bought CIF China but delivered into Antwerp, where premiums are usually $15-20 lower than the Chinese benchmark rate, traders also said.
"Most people are well-covered for Chinese New Year in February so no one is hurry to buy on the spot market," a Chinese smelter representative said.
Still, as businesses return to normality this month, that tightness appears to have eased slightly, pushing the TC up around $10. Smelters would prefer to buy at $180 but miners and traders have resisted, believing that TCs should be closer to $160. The suppliers assert that production cuts will constrict fundamentals in the first half of this year.
Annual negotiations are set to kick into full gear soon ahead of the usual settlement around the International Zinc Association (IZA) meeting in February.
But market participants are sceptical on the outcome while the difference in opinion between end-users and miners becomes more apparent, particularly with various parties under increasing pressure to cut costs in line with the depressed price of the metal.
In theory, the sizeable output curtailments should put concentrate suppliers in a stronger negotiating position but many will have stockpiled material throughout 2015 and so they may not be under as much pressure to chase supply.
And with zinc prices having fallen 29 percent over 2015, market makers are currently uncertain about what this year has in store for prices, which is crucial when determining base levels for escalators for annual contracts.
Discussions for 2016 supply had started, with miners initially offering TCs of $175 per tonne and smelters pushing for a rollover of the 2015 benchmark of $245, market participants noted.
"It indicates a possible settlement at $210-215. And the key element will be the basis price - that's the most controversial factor," one trader said. "I have heard $1,600, $1,700 and $2,000 but most likely scenario will be around $1,700. The price in Jan-Feb will have a prevailing influence over the benchmark base."
HIGH-SILVER LEAD TCS DROP DUE TO KZ EXPANSION, SUPPLY CUTS
For low-silver lead concentrates, TCs for spot tonnages have dipped $10 to $160-175 per tonne, with strong demand from Chinese smelters, many of which are still unable to get permits to import high-silver material without prohibitive duties.
"There's a shortage of mined [low-silver lead] material due to the low prices. Miners don't want to do business at the current price," a trader in China said.
TCs for high-silver lead concentrate remained at $170-180 per tonne, supported by production cuts from Glencore and by Korea Zinc's decision to lift lead smelting capacity by 100,000 tonnes per year to 430,000 tonnes per year, which will require an additional 210,000-260,000 tonnes of high-silver lead concentrate.
"Smelters are doing something they never did before - now they are trying to get more silver, they are expanding their silver operations in Korea and Germany in an effort to get any added value they can," one trader said.
"The reason is the silver price this year may be a decent performer - the higher the price, the higher the VAT is, which is a fixed cost for smelters and messes with the profit from high recovery rates [around 99 percent]. So they want more than $1.50 to offset the higher costs," another said.
As well, Glencore in October announced that it will reduce mined lead production by 100,000 tonnes. Concentrate from these specific mines are classified as high-silver (2-4 kg per tonne), market sources said.
(Additional reporting by Meimei Qin, Vicky Chen, Perrine Faye and Archie Hunter, editing by Mark Shaw)