Column: Third European smelter closure compounds zinc conundrum: Andy Home

Nyrstar NV

06/10/2022 13:55

By Andy Home
       LONDON, Oct 6 (Reuters) - Europe's energy crisis is
taking a rising toll on the region's industrial capacity with
another zinc smelter going into care and maintenance. 
    Glencore  GLEN.L  is curtailing production at its Nordenham
plant in Germany citing "various external factors affecting the
business and wider European industry." 
    It's the third West European zinc smelter to close over the
last year as operators struggle to cope with surging power
prices. 
    Smelting has turned out to be the weakest link in the global
zinc supply chain this year, creating pockets of extreme
tightness in the physical market. 
    The rolling supply woes contrast with an increasingly
negative demand picture and the bear-bull tension is manifest in
continued price and time-spread volatility on the London Metal
Exchange (LME) contract as traders try and work out whether
supply or demand is falling faster. 
    The LME's overnight move to limit the deliverability of
Russian zinc won't have much impact on physical supply but a
near 5% jump in the zinc price to $3,193 per tonne is a sign of
the collective uncertainty. 
    EUROPEAN SHUTDOWNS
    The Nordenham smelter, which produces around 165,000 tonnes
per year of refined zinc and alloy, will be shuttered from the
start of next month. 
    Glencore mothballed its Portovesme smelter in Italy at the
end of last year and Nyrstar  NYR.BR  closed its Budel plant in
the Netherlands last month. 
    Other plants are adjusting run-rates to avoid peak power
pricing periods as the entire European smelter sector fights a
ferocious margin squeeze. 
    Europe was already on track to lose 234,000 tonnes of
refined zinc production this year before the latest closure,
according to analysts at Macquarie Bank. ("Commodities
Compendium", Sept. 29, 2022)
    The smelter crisis is unlikely to abate until Europe gets on
top of its energy problems and manages the flow-through
consequences on its metals producers. 
    The growing number of hits to Europe's industrial ecosystem
has propelled the metals sector up the list of policy-maker
priorities but it's a long list. 
    GLOBAL WOES, RUSSIAN SANCTIONS
    Macquarie estimates another 240,000 tonnes of zinc
production has been lost outside of Europe this year due to a
combination of technical problems at some Western plants and
power constraints on Chinese smelters. 
    The International Lead and Zinc Study Group calculates a
2.4% slide in global refined zinc output over the first seven
months of the year. 
    The market is super-sensitive to supply-side headlines right
now, hence the knee-jerk reaction to the LME's announcement it
is limiting the deliverability of Russian zinc. 
    This comes in response to an extension of British sanctions
on Iskander Makhmudov, thought to be the ultimate owner of
Russian zinc and copper producer UMMC, albeit one obscured by a
series of holding companies. 
    The exchange won't accept any deliveries of UMMC's "CZP SHG"
zinc brand unless it was sold before Sept. 26, when the British
government announced sanctions, or unless the owner can prove
that UMMC has "no right of ownership and/or other economic
interests in respect of the metal". 
    There is no Russian zinc in the LME's warehouse system at
the moment and exports have almost dried up since a fire at the
Chelyabinsk smelter in 2018. The plant was permanently closed
with UMMC planning to shift production to other smelters in the
Urals. 
    However, Russian exports of unwrought zinc have slid from
over 40,000 tonnes in 2017 and 2018 to just 622 tonnes in 2021,
according to the International Trade Center. 
    That suggests much reduced export capacity and the latest
sanctions will likely have far more resonance in the copper
market than in zinc. 
    PRICING TENSION
    But zinc is still caught in the conundrum of pricing
simultaneously a global downturn in metals usage and 
accumulating refined metal losses. 
    Most analysts think the combined demand hit from China's
faltering property sector and a looming, energy-driven recession
in Europe will outweigh the growing toll of European smelter
closures. 
    Macquarie is forecasting the LME cash price to fall from an
average $3,647 per tonne in 2022 to an average $2,725 next year
as macro gloom overwhelms micro dynamics.  
    Citi agrees, saying it expects zinc to fall to $2,500 per
tonne by early next year as the manufacturing slowdown crushes
demand. ("Global Commodities Quarterly", Oct. 4, 2022)
    The nagging problem with the bear narrative is the depleted
state of exchange inventories which is generating time-spread
tightness on both the LME and Shanghai exchanges. 
    LME registered stocks are at a multi-year low of 53,325
tonnes, now down by 146,000 tonnes on the start of January.
Shanghai Futures Exchange (ShFE) inventory stands at 37,694
tonnes, the lowest it's been since July 2021. 
    The LME's benchmark cash-to-three-months spread  CMZN0-3 
has been in backwardation since the start of June, the cash
premium valued at $29.50 per tonne at the Wednesday close. 
    Although there is certainly more zinc sitting in the
off-market statistical shadows, owners can achieve a premium of
over $500 per tonne by selling it to a European physical buyer
rather than delivering it to an LME warehouse. 
    Fastmarkets has just lifted its mid-point assessment of
North European premiums to a new all-time high of $525 per tonne
over LME cash in the wake of the Nordenham news. 
    Premiums should be falling as high energy prices chill
European demand but the mounting loss of production from smelter
closures is clearly still working against physical buyers. 
    Until physical premiums loosen, it's hard to see how there's
going to be a significant rebuild in exchange inventory that
would complement the broader bear narrative. 
    The latest European smelter closure simply adds to the
tension between a decidedly bearish macro picture and zinc's
supply problems that are preventing a rebuild in stocks. 
   The opinions expressed here are those of the author, a
columnist for Reuters
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LME zinc supported by low stocks and more European smelter
closures    https://tmsnrt.rs/3ry4t04
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 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))