London 08/08/2016 - Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Zinc has been the favourite of base metal investors this year - the twice-told bull story for zinc seems increasingly tenable despite concerns that hidden refined stocks could come to the market when zinc prices are above $2,200 per tonne on the LME. But all that would depend on the big unknown of when Glencore is going to hit the restart button.
Treatment charges (TCs), the discounts miners grant to smelters to cover the cost of turning concentrate into metal, have fallen 45 percent over the past year to $105-115 per tonne CIF China at the end of July.
Market participants expect TCs - the best indicator of concentrates availability - to decline further, even to around $80 levels, in the coming month - the shortage of concentrates has not kept pace with demand.
Prices have felt the tension in concentrate supply - LME three-month zinc price hit a 14-month high of $2,294.50 per tonne on July 21, up almost 60 percent from a six-year low of $1,444 on January 12. It last traded at $2,276 on Monday.
On the refined metal side, the zinc market was in a deficit of 64,000 tonnes in January-May period, down from a surplus of 177,000 tonnes in the same period of 2015, according to data from the International Lead and Zinc Study Group (ILZSG),
GLENCORE NO RUSH TO RESTART
The very big unknown left for 2016 is whether Glencore is going to push the button. But let’s not forget that there is a time difference between the announcement of a restart and the actual mine resumption - prices will react quickly when the announcement is made.
Previously, industry participants were predicting Glencore would pull the trigger at LME prices of around $2,100-2,300 per tonne. It may seem that we are close to that critical moment now, but first we need to take into consideration how long it takes for a mine to restart.
It would take some three to nine months for Glencore to resume their suspended production, according to a well-informed source.
This means that even if a restart was announced in early September, the actual production will not be out this year.
Also, it is almost for sure that the reduced 500,000 tonnes of zinc concentrates from Glencore will not be back at one go as every mine has its own particularity and ramp-up periods would vary, the source said.
Luckily, Glencore has an unrivalled advantage of deciding the perfect timing to restart to its best interests. Big mines such as MMG’s Century and Vedanta's Lisheen are gone forever and there is currently no mining firm which is expected to restart a project of the same scale as Glencore, and thus the latter’s action alone will have a significant influence on the prices.
While there is no rush for Glencore to restart now, the timing of the announcement will prove crucial.
CHINESE ZINC CONC IMPORT SHORTFALL
Chinese smelters have shunned zinc concentrate imports so far this year - total imports of just above one million tonnes in the first half of this year were down 29.5 percent from 1.42 million tonnes in the same period last year, according to China’s customs data.
A closer look at import data shows monthly imports slowing since April this year, with year-on-year growths down 36.8 percent in April, 49.3 percent in May and 60.9 percent in June.
There were several factors involved in the declining growth rates. First, the LME-SHFE arbitrage window has been closed for most of this year and Chinese smelters have hence avoided spot imports. Second, domestic mine output and port stocks of concentrate are able to feed part - though not all - of the supply shortfall.
So how big is the concentrate import shortfall in China? Assuming everything else being equal, an estimated shortfall for imported ores in the second half would amount to around 211,000 tonnes on a zinc contained in ore basis.
And how much domestic mine production could make up for this gap? It is important to note that domestic output is not stable - production forecasts in China are quite opaque as most zinc mines are scattered in country and are subject to government scrutiny for environmental purposes.
Domestic mine production has been increasing over the past few months - although at 2.192 million tonnes in the first half of this year was down 5.75 percent year-on-year from 2.325 million tonnes, according to data from China's National Bureau of Statistics.
In 2015, total domestic mine production was 4.8 million tonnes, so at least another 2.6 million tonnes is needed in the second half to match last year's total output - assuming everything else being equal again - which rounds up to 434,000 tonnes per month.
Maintaining output at this level seems unrealistic - only June’s domestic production data has exceeded 434,000 tonnes so far this year.
For Chinese smelters, working stocks have also dropped to around an average of 20 days at end-July, compared with an average of 30 days previously.
“20 days are considered to be a normal level for working stocks. Many of them have accumulated a lot of stocks since late last year for vessels booked under the long-term contracts. But that is gone now,” said a mining source.
In port stocks, around 340,000 tonnes were stored in major ports such as Lianyun port, Fangcheng port and Qinhuang port in January this year but this declined to 140,000 tonnes in mid-July, according to trading sources.
DOMESTIC TCS FALL, IMPORT OR CUT?
Domestic TCs have also dropped during the past month - they were last around 4,700-5,000 ($706-751) yuan per tonne, down from 5,000-5,200 ($751-781) yuan on a delivered basis inclusive of VAT as most Chinese smelters relied on domestic concentrate supply this year due to the unfavourable arbitrage.
Domestic TCs and imported TCs differ in various aspects, including whether they are based on zinc contained in ore basis and/or payable metals. To put it simply, imported material is around 1,200 ($180) yuan per tonne more expensive than domestic concentrates on a contained basis at this time of calculation.
Sources see domestic TCs of 4,500-5,000 ($676-751) per tonne as the breakeven point for Chinese smelters; current levels would have been eaten into profits at some smaller smelters.
Sooner or later, Chinese smelters will have to either import concentrates - even at a closed arbitrage - or start cutting smelted metal output.
After all, you cannot have your cake and eat it too.
(Editing by Mark Shaw and Vivian Teo)