London 17/12/2015 - The zinc price is unsustainable at current lows so a strong upside is possible in 2016 given weak supply, Macquarie said.
Zinc dropped to a fresh six-and-a-half low in this morning's LME trading of $1,474 per tonne, down $46 on the Wednesday's close.
But mine and smelter cuts should help reduce zinc concentrate availability, the bank said in a note on Thursday. This tightness has already seen treatment charges (TCs) drop to $150-160 per tonne into China in recent weeks from around $200 between October 2014 and September 2015.
As well, the SHFE/LME arb is supportive of imports, with LME prices having been punished far more than on the Chinese exchange in recent months - on the SHFE, zinc was last at 12,550 yuan.
"That said, the ballpark import arb gain has been broadly steady since August, supporting the view that supply constraints are the key driving force in the more sudden descent in the spot TCs," it said, forecasting a 433,000-tonne deficit in zinc in concentrate for next year.
The substantial bulk of output cuts will come into play in 2016, with the scale of mine cuts implying sufficient feed shortages to close probably one smelter outside China and produce a zinc unit shortfall of around 400,000 tonnes inside China, the bank said.
Still, 10 major Chinese zinc smelters, which Macquarie calculated have joint capacity of just below three million tonnes per year, have jointly agreed to cut refined output by 500,000 tonnes.
"This was met with some scepticism in the marketplace, and indeed we have no guarantees that all or some of it will take place – but we find it compelling that such refined cuts are close to the known feed shortfall," Macquarie said.
The zinc market was oversupplied by 170,000 tonnes during the first 10 months of this year, the World Bureau of Metal Statistics (WBMS) said today.
This compares with an estimate from the International Lead and Zinc Study Group (ILZSG) of a surplus in the global zinc market of 213,000 tonnes in January-October this year. Still, the market swung to a 15,000-tonne deficit in October; given cuts and closures, further deficits are possible.
But high inventories are a hurdle to an increase. The bank pegged total zinc metal stocks, including off-warrant stocks, at around 1.74 million tonnes at the end of November, equivalent to around 6.6 weeks of world consumption.
Still, a shortage of raw material would translate into severe metal deficits from next year, which would erode zinc stocks to the five weeks, the bank believes.
"Resting on these assumptions and others discussed earlier, TCs should continue to compress while Chinese metal imports are seen picking up next year and Shanghai premiums should begin to lift to reflect this towards the end of first quarter of 201," it said.
"In a post-carry financing world, we think this latter datapoint is the key physical signal to look for when trying to pick the inflection for a sustained upside in zinc prices next year," it said.
The bank forecast an average price next year of $1,830.
(Editing by Mark Shaw)