Column: High-flying zinc shrugs off European smelter restarts : Andy Home

Nyrstar NV

02/05/2024 14:28

By Andy Home
       LONDON, May 2 (Reuters) - Belgium's Nyrstar  NYR.BR  is
reactivating the Budel zinc smelter in the Netherlands after a
four-month period of care and maintenance.
    The company, controlled by global trade house Trafigura,
said improved market conditions and the reinstatement of a Dutch
energy cost assistance scheme will allow the plant to restart
later this month, albeit not at full annual capacity of 315,000
metric tons. 
    It is the second European smelter to come out of care and
maintenance this year after Glencore  GLEN.L  re-fired its
165,000-ton-per year Nordenham smelter in Germany in February.
    The zinc market seems to have taken the news in its stride.
London Metal Exchange (LME) three-month metal  CMZN3  hit a
13-month high of $2,974 per ton on Tuesday. It is currently
trading just shy of that level at $2,880. 
    Zinc is being buoyed by the broader flow of investment money
into the base metals sector. But the zinc narrative has also
changed with focus shifting from smelter constraints to mine
supply issues.
    
    TIGHTER THAN EXPECTED MARKET
    Smelter treatment charges have collapsed this year,
signalling a squeeze on the availability of mined concentrates. 
    This year's benchmark terms were set at $165 per ton, down
from $274 in 2023. That is already looking generous to smelters.
Spot terms for Chinese import delivery have slumped to $30-50,
the lowest since 2018, according to price reporting agency
Fastmarkets. 
    This is the culmination of two years of falling mine
production. Global mine output shrank by 2.3% in 2022 and by
another 1.2% in 2023, according to the International Lead and
Zinc Study Group (ILZSG). 
    The Group's latest forecast is for mine supply to improve
this year but only by a marginal 0.7% and largely thanks to the
ramp-up of the 250,000-ton-per year Kipushi mine in the
Democratic Republic of Congo. 
    Constrained raw materials supply will act as a brake on
refined production growth this year, according to ILZSG, which
now expects metal supply to grow by just 0.6% this year,
compared with forecast growth of 3.3% when the Group last met in
October. 
    The sharp downgrade to global output explains why ILZSG has
cut its expected supply surplus for 2024 from a glut of 367,000
tons to a much more marginal 56,000 tons. 
    ILZSG's rethink about mine supply and the sharp cut in
forecast surplus mirror the latest forecasts from sister
organization the International Copper Study Group. 
    There is, however, a key difference between the two metals. 
    
    THE PRICE IS RIGHT
    Copper's mine supply woes have largely been due to
operational constraints or, in the case of the closed Cobre
Panama mine, a supreme court mandate. 
    Most of the zinc mines that have shut down over the last
year or so have done so in large part due to price. 
    The LME zinc price slumped from a record high of $4,896 per
ton in March 2022 to a low of $2,215 in May 2023, leaving a
trail of price casualties in its wake. 
    However, the recent rally means that prices are now trading
around $400 per ton above the 90th percentile cost of
production, according to analysts at Citi. 
    Every mine has its unique cost configuration and for some
price alone may not be enough, but the higher the price travels,
the greater the potential for restarts. 
    Swedish producer Boliden  BOL.ST , for example, has been
negotiating with unions at its Tara mine in Ireland on a new
contract that would pave the way for resuming operations after a
year of inactivity.
    The results of a ballot of union members are due on Friday,
according to local news sources. 
    The price has already voted. 
    
    FLUID LANDSCAPE
    ILZSG estimates European zinc mine production fell by 6.2%
in 2023 and is forecasting another 7.9% slide this year due to
the closure of Tara and the Aljustrel mine in Portugal. 
    If Boliden gets its union agreement at Tara, that will
change just as the restart of the Budel and Nordenham smelters
changes refined metal dynamics, particularly in Europe. 
    Zinc fundamentals are currently highly fluid. 
    So is fund positioning on the London market.  
    Investment funds were collectively net short of zinc as
recently as February, when the LME price was still below $2,500
per ton. 
    They were net long to the tune of 27,036 contracts at the
close of last week. Outright long positions of 59,391 contracts
are the highest they've been since June 2022. 
    Investor bull positioning is still modest by comparison with
some of other base metals such as copper, which has stronger
energy transition credentials.
    It is also likely to be more volatile simply because zinc's
fundamental landscape is shifting so fast. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
ILZSG forecasts a much reduced zinc supply surplus in 2024    https://tmsnrt.rs/3whGZSQ
Funds flip from bearish to bullish on LME zinc    https://tmsnrt.rs/3whctbM
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Christina Fincher)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))