(Repeats with no changes. The opinions expressed here are those
of the author, a columnist for Reuters)
By Andy Home
LONDON Feb 17 The recent history of the zinc
market has been one of reality trumping great expectations.
Everyone loves the zinc narrative of pending supply crunch.
It's just that it's been a long, long time coming with plenty of
false starts over the last few years.
Big mines such as Century in Australia and Lisheen in
Ireland have closed. The resulting tightening in the raw
materials segment of the supply chain has been accelerated by
Glencore's suspension of 500,000 tonnes of annual mine
But conspicuous by its absence has been any flow-through
impact on the refined metal market.
That, however, has just changed with Korea Zinc saying it
will cut refined zinc production by 7.7 percent, or around
50,000 tonnes, to 600,000 tonnes this year.
The company attributed its decision to tight supplies of
mined concentrate and the accompanying reduction in treatment
It is the first sign that raw materials shortfall is
translating into refined metal shortfall.
All that is missing for zinc bulls, of which there are many,
is for a tightening physical market to start impacting visible
stocks of metal. And particularly those sitting in London Metal
Exchange (LME) warehouses in New Orleans.
Outside of China mine supply of zinc fell by 10 percent last
year, according to the International Lead and Zinc Study Group
That sharp contraction followed four years of mild decline
or, at best, flattish growth.
That's how long zinc's bull story has been running but it's
only now that the accumulating pressures in the mined
concentrates part of the supply chain are working their way into
the refined metal market.
Slowing the transmission mechanism have been stocks of
concentrates, one of the last visible parts of the supply chain.
But quite evidently, if Korea Zinc had sufficient stocks, it
wouldn't be cutting production.
All eyes are now on China and its zinc smelters, which have
historically had to top up raw materials supply from domestic
mines with imports of concentrates.
Imports slumped by 38 percent last year to 2.0 million
tonnes (bulk weight) from 3.2 million tonnes in 2015.
Chinese figures for mined zinc production are notoriously
problematic but falling treatment charges and
falling imports suggest supply stress is building there too.
Canadian producer Teck Resources suggested in the market
commentary section of its Q4 results that Chinese "stocks of
zinc concentrates were drawn down to critical levels last
The inference is that's it's only a matter of time before
Chinese producers follow Korea Zinc and are forced to curtail
run-rates due to raw materials tightness.
All this is pre-written in zinc's bull narrative. It's why
the galvanising metal was the best performer among the major
LME-traded metals last year and why it's up another nine percent
so far this year at a current $2,840 per tonne.
The missing part of the story so far is any sign of pressure
on visible stocks of metal.
LME zinc stocks currently stand at 390,850 tonnes. They are
a lot lower than they used to be. This time four years ago the
headline figure was over 1.2 million tonnes.
But the decline last year was a highly modest 35,000 tonnes
despite an assessment by ILZSG that the global refined zinc
market recorded a supply-demand deficit of 286,000 tonnes.
Filling the gap has been unreported inventory sitting
off-exchange, particularly in New Orleans.
The market got badly wrong-footed in both 2014 and 2015 by
stocks miraculously reappearing in the LME system at the U.S.
The metal had apparently been drawn down but not for
physical consumption. It had just been on a merry-go-round
between on- and off-market storage, any price signal being
obscured behind the smoke and mirrors of the financing trade,
predicated as it is on cheap storage.
The U.S. port still holds more LME zinc than any other
location, 346,125 tonnes or around 89 percent of the total.
And there is still a sense that there is more sitting in New
Orleans than is visible in the LME's daily stocks reports.
This month has seen 18,525 tonnes of zinc put onto warrant
at New Orleans in reaction to the flare-up of tightness on the
nearby LME spreads.
It's a relatively small tonnage by comparison with some of
the "arrivals" of the past, but it's a reminder that hidden zinc
stocks could yet affect the timing of the next chapter of this
market's expected development.
The exact size of any off-market stocks is impossible to
say. You only get to see them when availability is tested in the
form of a squeeze on the LME.
That's what happened earlier this month with cash metal
trading out to a premium of $16.25 per tonne over three-month
It doesn't sound a lot but it's the tightest the period has
been since May 2015. The reaction came in the form of those
deliveries onto LME warrant at New Orleans.
The zinc time-spreads on the LME have eased over the last
few days with the cash-to-threes period CMZN0-3 returning to
contango. It ended Thursday valued at $6.75 contango.
But physical availability for LME delivery is likely going
to be tested again.
As of the close of business Wednesday one entity held LME
warrant and cash positions accounting for between 80 and 90
percent of available tonnage.
Quite what the play is remains to be seen but the
cancellation of 8,800 tonnes of zinc at New Orleans yesterday
should serve as a warning flag.
Because New Orleans holds the key to LME stocks and LME
stocks hold the key to the next phase of zinc's accelerating
(Editing by David Evans)