Column: European smelter squeeze keeps zinc close to record highs: Andy Home

Nyrstar NV

29/03/2022 13:53

By Andy Home
    LONDON, March 29 (Reuters) - London Metal Exchange (LME)
zinc recorded a new all-time high of $4,896 per tonne earlier
this month, eclipsing the previous 2006 peak of $4,580 per
tonne. 
    True, the March 8 spike was over in a matter of hours and
looked very much like the forced close-out of positions to cover
margin calls in the LME nickel contract, which was imploding at
the time before being suspended. 
    But zinc  CMZN3  has since re-established itself above the
$4,000 level, last trading at $4,100 per tonne, amid escalating
supply chain tensions. 
    Russia's invasion of Ukraine, which Moscow calls a special
military operation, doesn't have any direct impact on zinc
supply as Russian exports are negligible.
    But the resulting increase in energy prices is piling more
pressure on already struggling European smelters. 
    European buyers are paying record physical premiums over and
above record high LME prices, a tangible sign of scarcity which
is now starting to spread to the North American market. 
    The world is not yet running out of the galvanising metal
but a market that even a few months ago was expected to be in
comfortable supply surplus is turning out to be anything but. 
    EUROPEAN POWER-DOWN
    One European smelter - Nyrstar's Auby plant in France - has
returned to partial production after being shuttered in January
due to soaring power costs.  urn:newsml:reuters.com:*:nL5N2VM064
    But run-rates across the company's three European smelters
with combined annual capacity of 720,000 tonnes will continue to
be flexed "with anticipated total production cuts of up to 50%",
Nyrstar said.
    High electricity prices across Europe mean "it is not
economically feasible to operate any of our sites at full
capacity", it said.
    Still on full care and maintenance is Glencore's  GLEN.L 
100,000-tonne-per-year Portovesme site in Italy, another
power-crisis casualty. 
    Zinc smelting is an energy-intensive business and these
smelters were already in trouble before Russia's invasion sent
European electricity prices spiralling yet higher. 
    Record-high physical premiums, paid on top of the LME cash
price, attest to the regional shortage of metal. The premium for
special-high-grade zinc at the Belgian port of Antwerp has risen
to $450 per tonne from $170 last October before the winter
heating crisis kicked in. 
    The Italian premium has exploded from $215.00 to $462.50 per
tonne over the same time frame, according to Fastmarkets. 
    LME warehouses in Europe hold just 500 tonnes of zinc - all
of it at the Spanish port of Bilbao and just about all of it bar
25 tonnes cancelled in preparation for physical load-out. 
    Tightness in Europe is rippling over the Atlantic.
Fastmarkets has just hiked its assessment of the U.S. Midwest
physical premium by 24% to 26-30 cents per lb ($573-$661 per
tonne). 
    LME-registered stocks in the United States total a low
25,925 tonnes and available tonnage is lower still at 19,825
tonnes. This time last year New Orleans alone held almost
100,000 tonnes of zinc. 
    REBALANCING ACT
    About 80% of the LME's registered zinc inventory is
currently located at Asian locations, first and foremost
Singapore, which holds 81,950 tonnes. 
    There is also plenty of metal sitting in Shanghai Futures
Exchange warehouses. Registered stocks have seen their usual
seasonal Lunar New Year holiday surge, rising from 58,000 tonnes
at the start of January to a current 177,826 tonnes. 
    Quite evidently Asian buyers haven't yet been affected by
the unfolding supply crunch in Europe and there is plenty of
potential for a wholesale redistribution of stocks from east to
west. 
    This is what happened last year in the lead market, China
exporting its surplus to help plug gaps in the Western supply
chain. Lead, however, should also serve as a warning that global
rebalancing can be a slow, protracted affair due to continuing
log-jams in the shipping sector. 
    
    MOVING THE GLOBAL DIAL
    While there is undoubted slack in the global zinc market,
Europe is still big enough a refined metal producer to move the
market dial. 
    The continent accounts for around 16% of global refined
output and the loss of production due to the regional energy
crisis has upended the zinc market narrative. 
    When the International Lead and Zinc Study Group (ILZSG)
last met in October, it forecast a global supply surplus of
217,000 tonnes for 2021. 
    That was already a sharp reduction from its earlier April
assessment of a 353,000-tonne production overhang.  urn:newsml:reuters.com:*:nL8N2RF4E6
    The Group's most recent calculation https://www.ilzsg.org/static/statistics.aspx?from=5
 is that the expected surplus turned into a 194,000-tonne
shortfall last year. The difference was almost wholly down to
lower-than-forecast refined production growth, which came in at
just 0.5% compared with an October forecast of 2.5%. 
    With Chinese smelters recovering from their own power
problems earlier in the year, the fourth-quarter deceleration
was largely due to lower run-rates at Europe's smelters. 
    The ILZSG's monthly statistical updates are inevitably a
rear-view mirror but Europe's production losses have continued
unabated over the first quarter of 2022.
    Moreover, the scale of the shift higher in power pricing,
not just spot but along the length of the forward curve, poses a
longer-term question mark over the viability of European zinc
production.
    A redistribution of global stocks westwards can provide some
medium-term relief but zinc supply is facing a new structural
challenge which is not going away any time soon. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters.
 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LME zinc hits all-time highs as European smelter problems mount 
  https://tmsnrt.rs/3qLxLbv
European physical zinc premiums at new highs as supply dwindles 
  https://tmsnrt.rs/3qL8Apt
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Clarke)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))