Zinc prices climbed last week. The metal is now trading near the milestone of $3,000 per metric ton. The last time prices hit this level was in September 2007.
Zinc has doubled in price since it hit bottom in January of last year. As prices climbed, many buyers probably made the mistake of thinking prices were too high, missing this spectacular rally. However, buyers that subscribe to our monthly outlook, didn’t miss this rally. We recommended buying forward starting in April of 2016. Ever since, prices have risen without looking back.
Are prices too high now? That’s not even the question. The key now is to find clues of a market peak. So far, we see no signs that zinc’s bull market is topping. Given zinc’s tightening fundamentals, and the ongoing bullishness across the industrial metal complex, we see no reason to put a ceiling on this bull run. This rally may have further to run.
Shortfall in Refined Markets
The tightening in zinc’s raw material segment accelerated last year thanks to the closure of big mines such as Century, Lisheen and Glencore‘s suspension of 500,000 mt of annual mine capacity. These closures have impacted the supply of mine concentrates drastically and, this year we are finally seeing the impact in the refined metal market.
Lower zinc mine output has forced smelters to decrease treatment charges – the fees they charge to process ore into zinc – to historic lows of around $30 a tonne. The winners are the companies that mine zinc while the losers are the zinc smelters who struggle to operate due to shrinking margins. As we pointed out last month, given this struggle, it was only a matter of time before Chinese producers were forced to cut refined zinc output.
Last week, some of China’s largest zinc smelters jointly announced they will put about 540,000 mt of annualized capacity into indefinite maintenance. The announcement comes after China’s largest zinc smelter, Zhuzhou, started an indefinite maintenance period for 100,000 mt of smelting capacity earlier this month. In February, Korea Zinc Co. announced it will reduce its refined zinc output by 7.7% (or 50,000 mt) this year.
I don’t usually pay much attention to stock levels as they are not a leading indicator of price trends. However, as the mining shortfall hits the refined market, it makes sense to take a look at the availability of zinc stocks.
LME zinc stocks currently stand just below 400,000 mt, much lower than the 1.2 million mt reported in 2013. In addition, it has been reported that more than 100,000 mt of exchange stocks were cancelled over the past two weeks. That leaves a remaining open tonnage of around 200,000 mt, the lowest since December 2008. Another sign that tightness in the raw materials market is feeding through into the refined metal part of the supply chain.