Column: European smelter hits mean another year of zinc shortfall: Andy Home

Nyrstar NV

17/05/2022 01:00

(Repeats May 16 column without change)
    By Andy Home
    LONDON, May 16 (Reuters) - The global refined zinc market is
expected to register 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 to the tune of 193,000
tonnes in 2021. 
    The Group's latest twice-yearly analysis of the statistical
landscape marks a major reassessment of zinc market dynamics. In
October last year it forecast a cumulative surplus of 261,000
tonnes over 2021 and 2022. 
    Such are the perils of trying to capture a snapshot in time
of zinc's fast-moving fundamentals. 
    The big change in the intervening six months has been the
powering-down of European smelters in the face of historically
high power prices made worse 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 smelter bottleneck is unusual in the zinc
market, which has historically priced around mine production not
refining cycles. 
    
    REFINED PRODUCTION HIT
    Both mined zinc production and usage enjoyed a strong
post-COVID recovery last year, rising by 4.1% and 5.7%
respectively, according to ILZSG. 
    Refined metal production, however, didn't, global output
rising by an anaemic 0.4% relative to 2020. 
    Power constraints in China were followed by much bigger
problems in Europe, where energy costs were soaring even before
Russia began its "special military operation" in Ukraine.
    Glencore  GLEN.L  idled its Portovesme plant in Italy and
both it and Nyrstar  NYR.BR  have been running other European
smelters below capacity during peak power pricing periods.
    Analysts at Citi estimate that 660,000 tonnes of annual
smelter capacity is being restricted to some extent. ("Global
Commodities", April 29, 2022). 
    Hopes that power prices would fall with the advent of warmer
weather have been dashed by the escalating energy stand-off
between Europe and Russia. 
    ILZSG is forecasting another year of highly modest global
refined production growth of just 0.9%, not enough to match
anticipated demand growth of 1.6%.
    With Europe's smelters struggling and the Flin Flon smelter
in Canada coming to the end of its life, global output will be
driven by Chinese smelters this year.  
    China is expected to produce 2.5% more refined zinc this
year after 1.0% growth in 2021, when many operators curtailed
operations during a rolling power crunch. 
    That forecast comes with an important COVID-19 caveat given
China's current round of lockdowns is causing all sorts of
logistical problems for zinc smelters with national output
actually falling by 1.0% year-on-year in the first four months
of 2022.  urn:newsml:reuters.com:*:nL2N2X404V
    
    MINE BOOM
    World mine production of zinc is currently going through a
boom phase with 2022 expected by ILZSG to be another year of
robust 3.9% growth. 
    Most of that extra production will come from outside China,
where mine production growth is expected to accelerate from last
year's 1.9% but only to 2.3%. 
    The shift to surplus in the zinc concentrates market was
captured by this year's benchmark smelter treatment charges,
which rose to $230 per tonne from $159 per tonne in 2021.
    Lower smelter production in Europe has added to that surplus
and China's smelters were charging as much as $300 per tonne to
process concentrates into metal in late April, according to
Fastmarkets. 
    Spot charges have since eased but only slightly and it looks
like it's going to be a good year to be in the zinc smelting
business. 
    Or it is for those producers who don't have to worry about
record high power prices. 
    
    METAL SHORTAGE
    Such robust zinc mine production would in times past have
shaped the market narrative, the assumption being that greater
availability would lift smelter treatment terms and incentivise
higher refined output. 
    Mine surplus should be a leading indicator of metal surplus
subject to shipping and processing time. 
    However, it's not if a significant part of the world's
smelter capacity can't cover its power costs even with both
higher processing charges and elevated physical premiums for
metal. 
    Refined metal availability is currently determining pricing
as much as underlying mine balance, both in terms of LME basis
price and super-high physical premiums in Europe and the United
States. 
    LME stocks, which were largely located in Asia, have been
raided as metal is shipped to fill Europe's depleted supply
chain. 
    Headline inventory has slumped by 57% to 86,225 tonnes so
far this year. Most of that is awaiting physical load-out with
live on-warrant stocks standing at just 38,325 tonnes. 
    LME shadow off-warrant stocks have all but evaporated,
totalling 3,171 tonnes at the end of March, down from 93,000
tonnes a year earlier. 
    There is plenty of zinc in China which could be exported to
the rest of the world, but continued disruption in global
logistics may slow the response time to a favourable export
arbitrage opportunity. 
    
    A NARRATIVE KINK?
    At the start of the year lower European refined metal
production looked to be a transient phenomenon, a kink in zinc's
normal mine-supply narrative. 
    Five months on and energy prices have only risen further,
deferring expectations for a return to full smelting capacity. 
    The smelter twist in the zinc story isn't going away any
time soon, it seems. 
    Zinc has this month been caught up in the broader base
metals rout with bulls fleeing the sector and bears flexing
their muscles as the focus turns to China's loss of growth
momentum. 
    LME three-month metal at a current $3,575 per tonne is down
by 27% from its March peak of $4,896 per tonne. 
    Even after that precipitous slide, however, zinc is trading
just shy of 15-year highs. The fact that it's doing so despite a
full concentrates pipeline speaks to the scale of the smelting
bottleneck currently defining the market. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters
 

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ILZSG forecasts a second consecutive year of zinc supply deficit
   https://tmsnrt.rs/37R3q5g
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 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))