November 23, 2018 / 7:11 AM / 24 days ago

Zinc smelter bottlenecks propping up prices, for now

SINGAPORE/MELBOURNE (Reuters) - An expected surge in refined zinc output after a clutch of new mine openings has been derailed by bottlenecks at smelters across Asia, putting the brakes on an eye-watering price fall.

Benchmark zinc tumbled over 35 percent in the seven months to mid-September, with prices of the metal used mainly to rustproof steel also hurt by concerns of a global economic slowdown.

Prices are still down about 20 percent so far this year, but are expected to be underpinned in coming months by issues that have cut refining capacity in China, India, South Korea and Australia, according to industry sources.

A pause in zinc’s price slide is likely to help companies like Nyrstar, the world’s biggest zinc company, which reported a 74 percent fall in third-quarter profit last month.

“The main problem is the low utilisation rate at zinc smelters, especially at Chinese smelters, because they cut production in Q3 and early Q4,” said analyst Dina Yu at consultancy CRU.

China’s forced environmental cutbacks on zinc slag, or waste from the zinc smelting process, and falling refined prices in the second quarter, prompted many smelters to cut production.

“Some major smelters still need six months to stop their environmental problem and then they can increase the utilization rate to full production capacity by May of next year,” Yu said. “Prices will be supported in Q4 and next Q1 at least.”

TREATMENT CHARGES SURGE

The extent of the backlog at smelters in China - which accounts for roughly half of global zinc production - is reflected in a seven-fold surge over the past two months in the charges levied by the smelters to refine ore into metal.

These so-called treatment charges (TCs) have rallied from around $20 per tonne of concentrate for the first nine months of 2018 to more than $145 currently, the highest in two years.

Treatment charges have also surged on rapidly rising mine supplies in Australia and South Africa, which had been lured onto the market by the strong zinc prices that prevailed through 2017 and into early 2018, when prices hit a 10-year peak near $3,600.

Lower processing capacity in China has exacerbated an existing shortage of refined metal - reflected in the lowest zinc stocks in a decade at exchanges in London and Shanghai - along with production issues at plants elsewhere in Asia.

These includes lower production by Hindustan Zinc Ltd last quarter, job cuts and the suspension of a plant in Australia, and a potential environmental-related shutdown at a plant in South Korea, which is encouraging stockpiling.

The higher treatment fees have led to a pick-up in refined output in China lately, with October’s 501,000 tonnes the highest monthly total this year and nearly 10 percent above September’s tally.

However, due to a dearth of concentrate over summer, China’s total refined zinc production through October was close to 8 percent below the same period in 2017, and appears on course for its second straight annual decline.

“The physical zinc market is really tight,” said a Singapore-based trader.

“Concentrates have picked up but there is no smelting capacity. I don’t see the situation changing soon.”

Beyond the near-term tightness, analysts anticipate swelling mine supplies to trigger an eventual rise in refined metal output.

“I think the recovery in TCs may well lead to a rise in Chinese refined output in the coming months,” said Ross Strachan of Capital Economics.

“We predict the price of zinc will fall further as more mine supply comes on stream. Chinese demand is also lacklustre owing to the slowdown in China’s manufacturing industry. As such we expect the price of zinc to fall to $2,300 per tonne by end-2019.”

Reporting by Mai Nguyen in Singapore and Melanie Burton in Melbourne; additional reporting by Joori Roh in Seoul and Tom Daly in Beijing; editing by Gavin Maguire and Richard Pullin

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