OPINION - The million-dollar question about off-warrant refined zinc stocks

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Vicky Chenvicky.chen@fastmarkets.comPhysicals Reporter+44 (0) 20 7337 2141

London 25/05/2016 - Opinion pieces are the views of the author: they do not represent the views of FastMarkets

London 26/05/2016 - Zinc has been the darling of metals analysts for years - but every year it falls short.

Still, its fundamentals are improving - consumption may have slipped 3.9 percent in the first quarter of this year but global refined output fell a sharper 6.4 percent, according to the World Bureau of Metal Statistics (WBMS).

And global zinc mine output should fall 1.4 percent overall to 13.27 million tonnes in 2016, according to the International Lead and Zinc Study Group (ILZSG).

So will 2016 be the year things come together? Until the long-awaited deficit of refined metal materialises, the chances are it won't.

It's true that zinc concentrates are tight after MMG's Century and Vedanta's Lisheen mines closed their doors in 2015, with other projects yet to make up for their loss. Glencore and Nyrstar have also cut output due to low prices.

This is showing up in declining treatment charges (TCs), which miners pay to smelters to convert the raw material into refined metal; a higher TC indicates increased availability.

For 2016 contracts, miner Teck Resources and smelter Korea Zinc settled at $203 per tonne on a base price of $2,000 per tonne, down from $245 in 2015.

Teck and Glencore, meanwhile, settled at $188 per tonne on a base price of $1,500 - effectively the same level as Korea Zinc.

But lower base prices might indicate a more bearish view from Glencore. Does it have a much clearer picture of the size of off-warrant zinc stocks around the world that makes is less optimistic on price movements this year?

How much zinc is stored off-warrant? Knowing the answer to this frequently posed question - and when the metal might return to the market - could enable those trade on the LME to set their long/short positions at more precise price levels. But uncovering this price-sensitive information is difficult. 

Off-exchange zinc refined stocks across the US, Europe and Southeast Asia but excluding China are around 650,000-800,000 tonnes, sources estimate.

The so-called "dumping ground" of New Orleans holds around 80 percent of on-exchange metal although the US is not main region of consumption - warehouse games are to blame.

Still, New Orleans exchange stocks have fallen to 308,325 tonnes from 654,750 tonnes in September 2014, with a drawdown of 66,775 tonnes this year alone. An estimated 200,000-250,000 tonnes are stored off-warrant in the US.

In Johor and Port Klang, stocks have fallen 81.6 percent to 11,800 tonnes as of today from 66,450 tonnes on February 19.

The outflow is believed to be heading to the Indian market. A shortage of refined metal has emerged there since late January due to earlier operational issues at HZL - production fell 63,000 tonnes or 29 percent year-on-year in the fourth quarter of its 2015-16 financial year, it said.

Regional premiums spiked to $240 per tonne CIF Mumbai in February before settling at $145-155 per tonne, indicating that the shortage was met with ample off-warrant stocks.

In Asia, an educated guess is that there are 100,000-150,000 tonnes of zinc mainly in Malaysia and Singapore.

But that total is dwarfed by the estimated 350,000-400,000 tonnes of off-warrant stocks that have piled up in major European ports and warehouses over the past year.

And Chinese total stocks are around 480,000-510,000 tonnes - SHFE warehouses held 248,552 tonnes as of this Friday while stocks in other domestic warehouses were around 100,000-110,000 tonnes.

In Shanghai's bonded zone, stocks were around 90,000-100,000 tonnes at the end of May, according to various warehouse sources, while Chinese smelters collectively hold around 40,000-50,000 tonnes as working inventory.

Global off-exchange stocks total 880,000-1,060,000 tonnes while the LME, SHFE and CME held 659,465 tonnes on Friday.

Research group Wood Mackenzie expects stock levels to fall to 50 days of consumption by the end of the year - but this is 10 days short of what it defines as a tight market, which it does not see appearing until the first half of 2017.

So while a price jump above $2,400 per tonne is unlikely at some point this year, zinc's bullish story will be another bestseller in 2017.


(Editing by Mark Shaw)



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