Column: Zinc caught between weakening demand and sliding supply: Andy Home

Nyrstar NV

16/09/2022 13:46

By Andy Home
    LONDON, Sept 16 (Reuters) - The puzzle facing the zinc
market is whether demand or supply will fall hardest this year. 
    Both were down in the first half of the year, according to
the latest assessment by the International Lead and Zinc Study
Group (ILZSG). An estimated 3.0% drop in global usage marginally
outpaced a 2.6% slide in global production of refined metal.
 urn:newsml:reuters.com:*:nL4N2ZY34S 
    The figures are preliminary and subject to revision but they
capture zinc's conflicting dynamics and increasingly fractured
pricing. 
    The London Metal Exchange (LME) three-month price  CMZN3  is
currently trading around $3,080 per tonne, a long way off
March's record high of $4,896, as the market prices in Chinese 
demand weakness and the rising prospect of European recession. 
    LME time-spreads, however, remain volatile due to low stocks
availability and physical buyers are still paying record
premiums to get hold of metal. 
        
    
    DEMAND HIT
    Zinc's usage hit so far this year has come largely from
China, where a troubled property sector has depressed demand for
steel, including zinc-coated galvanized steel. 
    China's national steel production fell by 6.4% year-on-year
in the first seven months of 2022, according to the World Steel
Association https://worldsteel.org/media-centre/press-releases/2022/july-2022-crude-steel-production/.
 
    Attempts to revitalise the flagging commercial construction
sector are being stymied by a combination of continued rolling
COVID-19 lockdowns and power rationing in drought-affected parts
of the country. 
    Broader manufacturing activity has also taken a hit, both
official and Caixin purchasing managers indices indicating a
contraction in factory activity last month.  urn:newsml:reuters.com:*:nL1N30702O
    Demand fears have now spread to Europe, which seems to be
facing imminent recession due to soaring power prices. 
    The outright zinc price mirrors the macro pressures playing
out across the LME base metals complex and is in part down to
shifts in fund positioning as money mangers reduce their long
exposure.
    Investment funds have slashed their net long zinc position
from a record high of 62,744 lots in April to 29,053 as of the
Sep. 9 close. Other financial institutions, a category that
includes pension funds and insurance players, turned net short
of zinc in June for the first time since the LME started
publishing a Commitments of Traders Report in 2018. 
    The position has since flipped back to a small net long of
5,024 lots, but it's now a fraction of what it was at its
November 2019 peak of 42,334 lots. 
    
    LOW STOCKS
    The outright price is falling despite low exchange
inventory. 
    LME stocks currently stand at 75,700 tonnes, down by 123,625
tonnes on the start of the year. Almost a third of the remaining
tonnage is earmarked for physical load-out. 
    Shanghai Futures Exchange inventory has been sliding as
well, hitting a fresh 2022 low of 58,407 tonnes this week. 
    The Shanghai forward curve is in backwardation and so too is
the London market. The LME cash premium over three-month metal
 CMZN0-3  has eased from its June peak of $218 to $27.50 per
tonne at Thursday's close but the recent heightened spread
volatility can be expected to continue until inventory rebuilds
in a meaningful way. 
    LME inventory in Europe continues to comprise a single lot
at the Spanish port of Bilbao, while U.S. warehouses hold just
2,100 tonnes, all of it cancelled and due to depart. 
    Both regions remain gripped by acute tightness. European
buyers are currently paying record premiums of over $500 per
tonne on top of the LME price to secure spot units, according to
Fastmarkets. That's five times more than they were paying at the
start of 2021.
    
    SUPPLY HIT
    Europe is at the epicentre of the global zinc supply hit as
smelters struggle to cope with soaring power prices. 
    Nyrstar's  NYR.BR  315,000-tonne-per-year Budel smelter in
the Netherlands is the second to close fully after Glencore
 GLEN.L  placed its Italian smelter on care and maintenance at
the end of last year.  urn:newsml:reuters.com:*:nL1N2ZS0K7
    "It is clear that European smelter cuts will come deeper and
sooner than we anticipated," said analysts at Citi, forecasting
regional capacity utilisation will drop to 66% over the second
half of this year from 83% in 2021. ("Metals Weekly", Aug. 18,
2022)
    Power problems have also hit Chinese production in the last
couple of weeks with temporary curtailments due to rationing in
Sichuan province earlier this month.  urn:newsml:reuters.com:*:nL4N2ZV0UD
    Most of that capacity has already restarted but Chinese
refined zinc production is struggling this year, down 3.3%
year-on-year in the January-August period, according to Shanghai
Metal Market. 
    
    SHIFTING BALANCE
    Zinc's micro dynamics are shifting fast and at the moment it
seems that the demand hit is outpacing the supply hit. 
    The global market generated a supply surplus of 27,000
tonnes in January-June, according to the ILZSG, which was
expecting a significant deficit of 290,000 tonnes this year at
its April meeting. 
    While refined production has underperformed the Group's
forecast for 0.9% growth this year, demand has deviated far
further from expectations. An April forecast for 1.6% growth in
usage this year now looks highly optimistic given the 3.0%
estimated slide over the first six months of the year. 
    It's the demand outlook that's weighing on the outright zinc
price. But the accumulating supply problems are preventing any
rebuild in exchange inventory and keeping physical supply-chains
tight. 
    Is zinc bullish or bearish right now? The answer depends on
whether you ask a futures or a physical trader. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Conflicting signals in the London zinc market    https://tmsnrt.rs/3qGvZbi
European physical zinc premiums are at record highs    https://tmsnrt.rs/3eVPnyv
Funds cut their long exposure to LME zinc    https://tmsnrt.rs/3LnxB39
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Kirsten Donovan)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))