October 13, 2016 / 3:02 PM / 9 months ago

COLUMN-Zinc price slides, but is it a rewrite or a rewind of the bull story? Andy Home

7 Min Read

(The opinions expressed here are those of the author, a columnist for Reuters.)

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By Andy Home

LONDON, Oct 13 (Reuters) - It's been a brutal couple of days for the zinc price.

London Metal Exchange (LME) three-month metal slumped by $100 per tonne to $2,250 on Tuesday and the sell-off has extended to $2,210 today.

The five-year high of $2,418 achieved at the start of this month is starting to look a long way off, the slide coinciding with news of producers planning to increase output of mined metal.

Given that zinc's stellar run this year has been predicated on a tightness in raw material supply, does this amount to a rewrite of the galvanising metal's bull narrative?

Or is it nothing more than a technical rewind of over-exuberance?

More Zinc?

Tuesday's price rout took place the day after two apparently bearish bits of news hit the wires.

The first came from Abraham Chahuan, general manager of the Antamina mine in Peru. He told a news conference that the mine will likely double its zinc output to between 340,000 and 360,000 tonnes next year.

The second came from Vedanta Resources, which said that mined output at its Hindustan Zinc subsidiary had jumped 51 percent in the third quarter relative to the second with production over the next half-year expected to be "significantly higher" still.

It's precisely the sort of news that would appear to undermine the zinc bull narrative of a shortfall in mined metal.

The only thing is that neither is really "news".

Antamina is an unusual mine insofar as it is both a big copper and zinc producer with output of both prone to significant fluctuation depending on which part of the ore body is being exploited.

And the phasing of mining into a zinc-rich part of the deposit had already been flagged by one of the joint-venture owners.

Canada's Teck, which holds a 22.5-percent stake, provided a three-year production forecast in its Q4 2015 report.

"Zinc production is expected to increase significantly as the mine enters a phase with high zinc grades and a higher proportion of copper-zinc ore processed, with our share of zinc production during 2017 to 2019 expected to average more than 80,000 tonnes per year."

Mine sequencing is also the key to understanding Hindustan Zinc's apparent jump in production.

Second-quarter production was depressed by a high waste-to-metal excavation ratio in the open pit part of the Rampura Agucha mine. The sequencing changed in the third quarter, all part of what Sunil Duggal, Hindustan Zinc's chief executive, described on the Q2 analysts' call as the normal "feast and famine cycles" associated with any open pit mine as it gets deeper.

And third-quarter integrated zinc metal production was still 30 percent lower than in the same period last year at 149,000 tonnes.

As for increased forecasts for the next six months, this is all part and parcel of the transitioning of Rampura Agucha to underground operations and "as per the mine plan", according to Vedanta.

If anything, production risks may be skewed to the downside given the complexity involved in any big mine going underground.

Graphic on LME zinc positioning:

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Graphic on LME zinc technicals:

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Less Froth

Higher production at both Antamina and Hindustan Zinc will come as no surprise to zinc analysts.

So why did the market take fright on Tuesday?

In truth, such was the rate of advance in zinc prices that the "news" may simply have been the trigger for what was always on the cards technically.

The LME's Commitment of Traders Report has shown net money manager positioning growing from short in the fourth quarter of last year to 80,472-lot long as of last Friday.

Interestingly, it had already eased from a high of 84,454 lots earlier last week, suggesting some speculative froth was already being blown off.

And a lot more was blown away on Tuesday thanks to the LME three-month price falling through a particularly technically sensitive area either side of $2,300.

Not only a "big number" level, it was reinforced by no less than three moving averages, the 20-day, the 30-day and the 50-day. The 10-day had already been broken at a higher level.

It's the sort of chart cocktail that triggers stop-loss sell orders, which then feed on their own momentum.

Indeed, chart technicians, such as LME broker Marex Spectron, were warning that a further decline to the $2,225-2,235 area was to be expected.

However, Marex noted in its Thursday daily report that "a strong bid sits beneath the market for now at least".

"There are different rules to trading zinc and don't expect that to change just yet," it added.

In other words, there is still plenty of money chasing the zinc bull story, not least Goldman Sachs, which issued a note this morning, recommending a short-copper, long-zinc relative play based on "supply divergence".

The bank's analysts expect copper to continue to struggle against oversupply and zinc to be buoyed by undersupply.

The Gorilla in the Room

So the bull narrative seems intact for now.

But one bit of real news should make the market wary.

That was Belgian producer Nyrstar's announcement on Sep. 27 that it is reactivating its Middle Tennessee mines.

These were put on care and maintenance at the worst of the zinc price trough in December last year but "given the current strength in zinc prices and Nyrstar's expectation that these prices are sustainable, it is now time to restart the three mines and processing plant".

Now, these mines only generate around 50,000 tonnes per year of contained zinc and the restart process is going to be lengthy with full output only expected in November next year.

But they do highlight the 500,000-tonne gorilla in the room, namely the mine capacity that was mothballed by Glencore at the end of last year.

The suspension of around 4 percent of global mine supply acted, and continues to act, as a powerful accelerator of a natural tightening of the zinc supply chain.

Even Goldman warns that one "main downside risk to the (long zinc, short copper) trade in our view would be news of imminent Glencore zinc restarts".

Glencore has so far held its fire. How long it continues to do so remains the key to whether the zinc bull story needs to be rewritten rather than just rewound. (Editing by Greg Mahlich)

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