Column: European smelter successes mean another year of zinc shortage
LONDON, May 16 (Reuters) – The global refined zinc market is expected to face a supply shortfall of 292,000 tonnes this year, according to the International Lead and Zinc Study Group (ILZSG).
It will be the second consecutive year of deficit after global production fell short of demand by 193,000 tonnes in 2021.
The latest semi-annual analysis of the Group’s statistical landscape marks a major reassessment of the dynamics of the zinc market. In October last year, it forecast a cumulative surplus of 261,000 tonnes over 2021 and 2022.
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Such are the dangers of trying to capture a snapshot in time of rapidly changing zinc fundamentals.
The big change in the next six months was the shutdown of European smelters in the face of historically high electricity prices, aggravated by the war in Ukraine.
Europe accounts for around 15% of global zinc refining capacity, meaning it is now acting as a major drag on global run rates.
Such a significant bottleneck in smelters is unusual in the zinc market, which has historically priced around mine production, not refining cycles.
REFINED PRODUCTION HIT
Production and use of mined zinc both saw a strong post-COVID recovery last year, rising 4.1% and 5.7% respectively, according to the ILZSG.
Production of refined metals, however, did not increase, with global production increasing anemic 0.4% from 2020.
Energy constraints in China were followed by much bigger problems in Europe, where energy costs were skyrocketing even before Russia began its “special military operation” in Ukraine.
Glencore (GLEN.L) idled its Portovesme plant in Italy and itself and Nyrstar (NYR.BR) operated other European smelters below capacity during peak electricity pricing periods .
Citi analysts estimate that 660,000 tons of annual smelter capacity is constrained to some extent. (“Global Commodities”, April 29, 2022).
Hopes that electricity prices would fall with the onset of warmer weather have been dashed by the escalating energy standoff between Europe and Russia.
The ILZSG predicts another year of very modest growth in global refined production of just 0.9%, insufficient to match the expected demand growth of 1.6%.
With European smelters struggling and the Flin Flon smelter in Canada nearing end of life, global production will be driven by Chinese smelters this year.
China is expected to produce 2.5% more refined zinc this year after growing 1.0% in 2021, when many operators scaled back operations during a power crisis.
This forecast comes with an important COVID-19 warning, as the current series of shutdowns in China are causing all sorts of logistical problems for zinc smelters, with domestic production actually declining by 1.0%. year-on-year in the first four months of 2022.
Global zinc mining production is currently going through a boom phase, the ILZSG expects 2022 to be another year of robust growth of 3.9%.
Most of this additional production will come from outside China, where mining output growth is expected to accelerate from 1.9% last year, but only to 2.3%.
The shift to surplus in the zinc concentrate market was captured by this year’s smelter benchmark processing charge, which rose to $230 per tonne from $159 per tonne in 2021.
Lower smelter output in Europe added to that surplus, and Chinese smelters were charging as much as $300 a ton to turn concentrates into metal at the end of April, according to Fastmarkets.
Spot charges have since declined, but only slightly, and it looks like it will be a good year to be in the zinc smelting business.
Or it’s for producers who don’t have to worry about record high electricity prices.
Such robust zinc mine production would have shaped the market narrative in the past, with the assumption that greater availability would increase smelter processing conditions and incentivize higher refined output.
Surplus from mine should be a leading indicator of excess metal subject to shipping and processing time.
However, this is not the case if a significant portion of global foundry capacity cannot cover its energy costs, even with higher processing fees and high physical metal premiums.
The availability of refined metals currently drives prices as much as the underlying mining balance, both in terms of the LME base price and the very high physical premiums in Europe and the US.
LME stocks, which were largely located in Asia, have been looted as metal is shipped to fill Europe’s depleted supply chain.
Main inventory has fallen 57% to 86,225 tonnes so far this year. Most of this quantity is awaiting physical loading with live stocks under warrant amounting to only 38,325 tons.
Non-mandated LME fictitious stocks all but evaporated, totaling 3,171 tonnes at the end of March, compared to 93,000 tonnes a year earlier.
There is plenty of zinc in China that could be exported to the rest of the world, but the continued disruption to global logistics could slow the response time to a favorable export arbitrage opportunity.
A NARRATIVE PLACE?
At the start of the year, the decline in European refined metals production appeared to be a transitory phenomenon, a knot in the normal zinc mine supply narrative.
Five months later, energy prices have only risen, postponing expectations of a return to full smelting capacity.
The foundry twist in zinc history isn’t going away anytime soon, it seems.
Zinc has been caught in the broader base metals rout this month, with bulls fleeing the sector and bears flexing their muscles as attention turns to China’s loss of growth momentum.
The LME’s three-month metal at a current price of $3,575 a tonne is down 27% from its March high of $4,896 a tonne.
Even after this precipitous drop, however, zinc is trading just below 15-year highs. The fact that it does so despite a full pipeline of concentrates speaks to the magnitude of the smelting bottleneck that currently defines the market.
The opinions expressed here are those of the author, columnist for Reuters
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Editing by David Evans
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