(Correcting to clarify European premium expectation $10-15 above 2016)
London 05/09/2016 - Next year's annual premiums for special high-grade zinc ingots will be mixed, market observers predicted, with the picture for Asian markets still clouded while European rates are set to rise.
Tightness in zinc concentrates is widely acknowledged and is seen leading to a growing shortage of refined metal. Still, this does not necessarily mean higher premiums globally, according to multiple market players.
The global market for refined zinc was in deficit by 138,000 tonnes in the first six months of 2016 - concentrate output declined 6.7 percent year-on-year, the International Lead and Zinc Study Group (ILZSG) said.
Annual premiums for 2017 are largely expected to be slightly lower on a CIF Shanghai basis than the 2016 settlement of $100-120 per tonne. But much hinges on the arbitrage ratio between the LME and the SHFE during the negotiation period.
"My theory is that it will be $5-10 lower as most traders would rather buy on the spot market due to the bad arbitrage in 2016 and they are not willing to take big risks," a trading source said. "They would only be willing to sign long-term contracts if suppliers could give them some discounts from this year's number."
The LME-SHFE arb window has been mostly closed this year while Shanghai bonded stocks jumped to 113,000-127,000 tonnes at the end of July from 60,000-75,000 tonnes at the end of January.
"There are a lot of uncertainties till the end of the year. Now we are in September, a potential rise in demand could push SHFE zinc prices higher. We've already seen the arb improve in recent days and it will probably open in October ahead of negotiation time. I do not necessarily see premiums decreasing much in China," a Shanghai-based trader said.
Some market participants in Southeast Asia expect little change in the annual benchmark from this year. One trader in Asia highlighted the normalisation of operations at Hindustan Zinc and higher production there next year, which should put pressure on premiums.
"Also, there are still quite a lot of off-warrants stocks lingering and if those come to the market then rates would be down," he added.
But rates could climb $5 for 2017, another smelter said, citing a widening market deficit that will first be felt in Asia and which could prompt the opening of the arbitrage window and attract metal in from Southeast Asia.
HIGHER PREMIUMS IN ROTTERDAM, UNCERTAINTY ON ITALY
Europe's annual benchmark is expected to be higher than the 2016 settlement because a tight concentrates market will translate into a shortage of refined metal. The 2017 rate should be $10-15 per tonne higher than this year's level of $125-145 per tonne duty-paid FCA Rotterdam, market participants forecast.
"We will start our negotiations pretty soon with our customers and expect the number to be at least $140-155," one European zinc smelter said.
Customers are not in a strong negotiating position this year due to a widening supply deficit, a second European zinc smelter claimed, while others foresee a refined zinc shortage materialising in the first half of next year.
"We already have customer enquiries for next year. And if you offer $5 higher, I would say most of them would be very happy to sign right away," a European zinc trader said.
Supply discipline by major miners and traders is also a vital factor, another trader added.
"All the metal is in the hands of major traders and producers. They are going to be disciplined in the way they price, sell and release the material. But they have a lot of tonnage that they need to sell so it is not an easy task," a trader in Europe said.
But some expressed doubts about the Italian market due to increased competitions and the strategies of major players.
"It is really hard to say in Italy as the market is more competitive. It will depend on how sensible the suppliers are - if they sell at whatever it takes to gain a bigger market share, then the final premiums would be even lower than last year," a third trading source said.
Still, Glencore dominates the local market and has the ability to bring more units there or to hold off and thereby keep premiums steady , others said.
"They have been exporting less from Spain to the US and bringing more metal from Kazakhstan to Europe. If they keep the strategy for 2017, rates might drop," a second smelter source said.
(Edited by Mark Shaw)