Column: Zinc stocks at historic lows after a year of smelter woes: Andy Home

Nyrstar NV

21/12/2022 01:00

(Repeats Dec. 20 column without change)
    By Andy Home
       LONDON, Dec 20 (Reuters) - Where has all the zinc gone? 
    London Metal Exchange (LME) warehouse stocks of the
galvanising metal total 36,525 tonnes, the lowest amount this
century. 
    Almost 60% of that metal is earmarked for physical load-out,
leaving just 15,175 tonnes of live tonnage, no more than a few
hours worth of global consumption. 
    Shanghai Futures Exchange stocks are equally depleted at
22,642 tonnes. 
    The clear-out of visible zinc inventory has played out in a
year of weak demand, usage falling by 3.2% over the first 10
months of this year, according to the International Lead and
Zinc Study Group (ILZSG). 
    But supply has fallen just as hard, reflecting an
unprecedented year of smelter problems, particularly in Europe. 
   
    The LME zinc price  CMZN3  has been under pressure this
month, sliding from a high of $3,339 per tonne to a current
$3,060 as the prospect of European recession further darkens the
demand outlook. 
    But extremely low stocks and uncertainty over Europe's
smelter sector are cushioning the downside as the market
continues to weigh up the relative under-performance of both
supply and demand.
    SMELTER DISRUPTION
    Global refined zinc output fell by 3.2% in January-October,
according to the ILZSG, matching the drop-off in usage. 
    Production fell in China, Kazakhstan, Canada and Mexico, all
of which are major sources of refined metal. 
    But the biggest hit was to European production this year as
the region's smelters faced an acute margin squeeze due to the
rolling energy crisis. 
    Glencore  GLEN.L  mothballed its 100,000-tonne per year
Portovesme plant in Italy at the end of 2021 and put its
165,000-tonne per year Nordenham smelter in Germany on care and
maintenance last month. 
    Nyrstar  NYR.BR , owned by Trafigura, did the same with its
315,000-tonne per year Dutch smelter in September, although the
plant has since resumed production "on a limited basis". 
    The company's Auby smelter in France, by contrast, will now
not come back from scheduled maintenance but remain on care and
maintenance until further notice. 
    Other operators continue to adjust capacity in response to
changes in local power pricing, which in Europe remains a
fractured and highly variable landscape. 
    CHANGED TRADE FLOWS
    The loss of regional supply has kept European physical
premiums elevated despite softening demand. 
    Fastmarkets assesses the northern European premium at a
mid-point of $520 per tonne over LME cash and the southern at
premium at $585 per tonne, a fresh record high.
    The U.S. physical market has been equally stretched, with
availability not helped by the planned permanent closure of the
Flin Flon smelter in Canada. 
    Such historically high premiums in the physical supply chain
have both diverted metal from the terminal market and inverted
China's normal trade flows. 
    China has historically been a significant importer of
refined zinc to the annual tune of 400,000-700,000 tonnes over
the last decade. 
    This year it is on course to turn a net exporter for the
first time since 2007. Imports collapsed and exports surged to 
78,500 tonnes in the January-October period. 
    Almost half that tonnage has been shipped to Taiwan,
noticeably one of the few LME delivery points to have seen any
fresh inflows this year. 
    But Chinese zinc has also been exported to far-flung
destinations such as Turkey, Italy, Mexico and the United States
to plug gaps in the rest of the world's supply. 
    The outbound flow of metal has acted to drain Chinese
stocks, both visible and those lying in the off-market shadows.
Shanghai Metal Market (SMM) estimates total "social" inventories
of zinc ingot across seven domestic markets at a low 56,000
tonnes. 
    RECOVERY RATES
    Zinc pricing this year has reflected the conundrum of weak
Chinese demand, thanks largely to a struggling property sector,
and simultaneous supply-chain tightness in the rest of the
world. 
    Next year's outlook depends a lot on whether demand or
supply recovers fastest, assuming either recovers at all. 
    Recession in Europe will come before recovery in China,
according to analysts at Citi. The bank's base-case forecast is
for the zinc price to ease steadily to $2,600 per tonne in the
third quarter of 2023 to reflect the Western demand hit.
("Global Commodities Annual Outlook 2023")
    Macquarie Bank agrees, forecasting prices to bottom out at
$2,500 in the second quarter and to remain subdued as the market
shifts back to surplus. ("Commodities Compendium")
    A return to surplus, however, assumes that the supply side
can recover from this year's collective under-performance. 
    China's lifting of restrictions and rising demand should
incentivise the country's smelters to turn back on the taps
after what SMM estimates to have been a 2.0% slide in national
output so far this year. 
    High treatment charges, currently around $270-290 per tonne
in China, will help smelter margins both there and everywhere
else. 
    That should in theory pave the wave for European smelters to
reactivate capacity once the power crisis abates, most likely in
the second quarter as the region emerges from winter.
    But smelters of any metal have a history of staying closed
after a prolonged period of inactivity, the costs of reopening
sometimes not worth the return. 
    Moreover, while European power prices have fallen
significantly in recent weeks, they remain well above levels
that were regarded as normal before Russia's "special military
operation" in Ukraine. 
    The longer-term question-mark over Europe's power-hungry
smelters hasn't gone away, injecting a whole new twist in the
zinc market narrative.
    In the short term the zinc market is going to remain
beholden to the European power market. Any more smelter
suspensions or any shift to permanent closures could yet turn a
bearish market on its head. 
    The opinions expressed here are those of the author, a
columnist for Reuters
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
A year of smelter woes has depleted global zinc stocks    https://tmsnrt.rs/3G5Xwvb
European physical zinc premiums hold new record highs    https://tmsnrt.rs/3jjqqz9
China flips to net exporter of refined zinc in 2022    https://tmsnrt.rs/3jk6I6t
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))