By Andy House
By Andy House
LONDON, March 25 (Reuters) – This yr’s benchmark zinc smelter remedy costs have been set at a 12-year excessive of $299.75 per tonne, in accordance with Fastmarkets.
This isn’t stunning.
The spot market has swung even larger in latest months as a surplus of mined zinc focus works in favour of smelters, permitting them to cost extra for changing uncooked materials into refined metallic.
As such, the 2020 benchmark conforms with the bear zinc narrative that has been enjoying out during the last yr or in order the worldwide market switches from continual provide shortfall to abundance.
However there’s a sense that this yr’s benchmark is already a backward-looking indicator because the unfold of the coronavirus chills the zinc provide chain, with a rising variety of mines closing or decreasing operations.
This can be a key differentiator with the demand shock of 2008-2009. The provision response then took months to materialise as producers gritted their enamel and struggled on. This time many don’t have any selection however to heed their governments’ lockdown orders.
TOP OF THE CYCLE
As reported by Fastmarkets, the benchmark deal was concluded between Canadian miner Teck Assets TECKb.TO and South Korean smelter Korea Zinc 010130.KS, the 2 corporations which have traditionally set the remedy costs for annual shipments.
It represents a pointy improve from final yr’s benchmark of $245 per tonne and is the very best annual reference level since 2008, when it got here in at $300.
Worth participation clauses seem to have been dropped this yr. That is comprehensible, provided that it requires either side to agree an anchor level round which worth participation can work. Who, proper at this second, can forecast the worth of zinc, or absolutely anything else, over the approaching weeks and months?
The query, nonetheless, is whether or not this annual benchmark is definitely related in such a fast-changing market atmosphere. There are reviews that spot remedy costs are already falling quick as ever extra world mine capability is frozen by nationwide lockdowns.
MINES ORDERED TO CLOSE
When it comes to the worldwide zinc market the only largest provide hit up to now has come out of India, the place the federal government has ordered a 21-day lockdown.
Hindustan Zinc HZNC.NS, with annual manufacturing of 690,000 tonnes in 2019, has quickly halted all operations till March 31.
Nonetheless, the corporate is a completely built-in producer with concentrates handled in-house, that means the closure ought to on paper have little direct affect on the freely-traded concentrates market.
Extra important by way of smelter provide chains is the half closure of Peru’s mining sector.
The nation’s mines churned out virtually 1.5 million tonnes of zinc in each 2017 and 2018. Home smelter capability is restricted to Nexa Assets’ NEXA.N Cajamarquilla plant, which produced 333,000 tonnes of refined metallic in 2018.
The majority of the nation’s zinc concentrates are exported, making Peru a key participant in world uncooked supplies availability.
The extent of the collective shutdown remains to be unsure with some mines, akin to the enormous Antamina, deemed to be crucial and allowed to proceed working.
That mentioned, a cumulative supply-side shock is constructing, albeit not as quick because the demand shock already roiling zinc and different base metals.
PRICE PAIN
Furthermore, these government-mandated closures are prone to be adopted by a second wave of price-related closures.
London zinc CMZN3 hit a four-year low of $1,675 final week and has struggled to stage any sustained restoration, final buying and selling at $1,805.
The downtrend has been working since late January, the coronavirus accentuating the present bear narrative of oversupply.
Analysts at Citi estimate that on the premise of so-called “C2” manufacturing prices, that means money prices plus depreciation, round 25% of the world’s zinc mines are actually shedding cash. (“Metals Weekly”, March 25, 2020)
True, the price curve so beloved by analysts is itself a fast-moving goal, notably proper now when oil (vitality) inputs are additionally falling and the greenback is rising, buffering non-dollar producers.
On the debit aspect for zinc miners, nonetheless, is the truth that the 2 most typical by-products of zinc manufacturing, lead and silver, are additionally experiencing bombed-out worth ranges.
METAL OVERSUPPLY BUT…
Welcome to the brand new coronavirus world, which is not like something metallic markets have seen earlier than.
The demand shock rolling around the globe within the wake of the virus is just like that skilled in the course of the International Monetary Disaster a decade in the past.
Citi expects the worldwide refined zinc market to report a 500,000-tonne surplus of provide over demand this yr, annualising at the next 1-million tonne surplus within the second half of this yr.
That compares with an October 2019 evaluation by the Worldwide Lead and Zinc Research Group that the worldwide market surplus can be round 200,000 tonnes in 2020.
Citi has simply reduce its short-term zinc worth forecast to $1,650 per tonne, at which stage it might be buying and selling deep into the worldwide price curve.
Nonetheless, the rising record of mine casualties, each from lockdown and old school mine economics, implies that a provide response goes to reach a lot quicker than in earlier worth slumps.
The financial institution “conservatively” fashions 800,000 tonnes of mine manufacturing losses over the second half of this yr. That is equal to round 6% of worldwide output.
“Focus shortfalls would have an effect on smelter charges from (the second half of 2020) onwards and we now truly mannequin 2020 as a full-year balanced focus market.”
If that evaluation seems to be correct, it might mark a pointy turnaround in zinc’s bear narrative. Certainly, Citi means that zinc is changing into a medium-term purchase as the conventional commodity boom-bust cycle is accelerated.
A forecast balanced uncooked supplies market, nonetheless, additionally locations an enormous question-mark in opposition to the benchmark deal simply negotiated for focus deliveries to smelters this yr.
A top-of-the-cycle benchmark is a good reflection of the zinc concentrates market previous to January. However that authentic script has now been ripped aside by the coronavirus.
The virus has uncovered the entire idea of setting market phrases that apply for a full calendar yr.
It could be time for the zinc provide chain to evolve.
Zinc smelter costs at decade excessive however for a way lengthy? https://reut.rs/39cVt4R
(Modifying by Kirsten Donovan)
(([email protected], 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))
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