Commodity Analysis

Zinc soars on supply squeeze

Andy Home | Updated on November 22, 2020 Published on November 22, 2020

LME 3-month zinc hit a new 18-month high of $2,793 per tonne on Friday

Zinc has emerged as the unlikely star performer in the London Metal Exchange (LME) base metals suite. LME three-month zinc hit a fresh 18-month high of $2,793 per tonne on Friday and is even outperforming high-flying copper.

The trigger for the latest leap higher was news that the Gamsberg mine in South Africa is shuttered until further notice.

Demand, meanwhile, is running strong in China, where zinc has been sucked into steel’s bull orbit.

The same cannot be said of the rest of the world but surplus zinc is being absorbed by the supply chain as “stealth stocks”, accumulating away from the market’s view in the form of rising LME shadow inventory and producer stocks.

Mine squeeze

The temporary closure of Gamsberg, which was in the process of ramping up to first-stage capacity of 250,000 tonnes per year, has left another hole in the mined concentrates market. Zinc and sister metal lead have been hard hit this year by national quarantines in key supplier countries such as Peru, Bolivia and Mexico.

A market that was expected to register a significant excess of mine production this year is now running short.

The International Lead and Zinc Study Group (ILZSG) was anticipating a 4.7 per cent surge in mined output this year when it met in October 2019.

Fast forward to October 2020 and the outlook is now for global production to actually fall by 4.4 per cent. The tensions in the raw materials segment of the zinc supply chain are clear to see.

Smelter treatment charges in China have tumbled to two-year lows under $100 per tonne as operators compete for concentrates. That’s a long, long way below this year’s benchmark terms of $299.75.

Chinese demand recovery

Shanghai zinc has been dragged into a raging bull market in the steel sector, as locals bet on anything that will benefit from the latest government construction and infrastructure stimulus.

Zinc is an obvious beneficiary of China’s steel boom since galvanised steel accounts for about half of the metal’s usage.

Citi is expecting the recovery in output of white goods in China to continue as the current construction boom translates into more property completions, at which stage white goods enter the equation.

Stealth stocks

A mine supply crunch and Chinese demand recovery are the twin motors of zinc’s resurgence from a low of $1,675 in March.

Missing, however, is any sign of physical tightness in the refined metal segment of the market.

However acute the raw materials squeeze on Chinese smelters and however strong demand is running, China has had no need to step up its purchases from the rest of the world in the way that it did during the last financial crisis. Since China has not cleared the world’s surplus of zinc, there may be a lot of metal around.

The ILZSG’s October forecast was for a supply-demand surplus of 620,000 tonnes this year.

LME-registered stocks have risen by 171,500 tonnes this year, although from an acutely low base of just 51,200 tonnes at the end of December.

London Metal Exchange shadow stocks - metal not on warrant but being stored with the option of exchange delivery -- rose by 65,000 tonnes between February and September. There is more sitting in deeper storage in the physical supply chain.

There is no credit crunch in the Covid -19 crisis, meaning excess stocks can be financed by the physical supply chain. From a producer’s perspective, this helps support physical market premiums and, by keeping part of the surplus hidden away from the LME, accentuates the bull market optics. Reuters

Reuters

 

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Published on November 22, 2020
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