On the face of it, zinc is yet another base metal on a bull run, from a low of $1,675 per ton in March of this year to around $2,800 per ton now.
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An ING Bank report makes the case for strong fundamentals — constrained supply and robust demand from China squeezing the market from an expected surplus to a pronounced deficit this year. But there’s more at play.
The closure of Vedanta’s Gamsberg mine in South Africa following a serious accident, which generates some 250,000 tons per annum of zinc concentrate. Reuters points to a collapse in Chinese smelters charges to two-year lows under $100 per ton as operators compete for concentrates said to be in short supply. That’s a long, long way below this year’s benchmark terms of $299.75 the article reports.
ING quotes the International Lead and Zinc Study Group who reported that although demand has also fallen, it is still higher than output this year. The ILZSG predicts a deficit of 650,000t for 2020 — much higher than the 220,000 tons currently in stock at the LME.
Caution on China importing
In China, zinc seems to have been caught up in the stimulus narrative, drawn higher by steel demand where half of all zinc consumption ends up, as galvanized construction beams, bars and appliances needed to furnish those new apartments.
But robust as ING’s case is for zinc’s strength, some caution may be in order. Unlike copper and aluminum, China has not reverted to becoming a net importer of refined metal, raising the question of just how strong demand really is.
Cumulative net imports of 332,000 tons in the first nine months of this year were 24% lower than last year and the lowest January-September tally of any year since 2015 Reuters observes. Clearly, China has had no need to step up its purchases from the rest of the world in the way that it did during the last financial crisis or as it has this year for copper and aluminum.
Zinc bull run or mirage?
Meanwhile, LME registered stocks have risen by 171,500 tons this year and from the LME’s new “off-warrant” stocks report, a monthly count of what the exchange terms “shadow” stocks, metal parked there has increased by a further 65,000 tons between February and September, in a similar way to the millions of tons of shadow aluminum stocks that have grown this year. Unlike aluminum though Reuters believes very significant quantities are hidden in the supply chain, citing Glencore’s Spanish refinery at San Juan de Nieva, where production has continued but exports have dropped sharply inferring the article says a missing 111,100 tons sitting in storage.
The ILZSG is predicting a rebound in refined zinc output next year to 13.14 million tons and a rise in demand to 13.52 million tons, suggesting the market will remain in apparent deficit. That’s a scenario that long-position holders are fervently hoping proves true.
While the industry and financial speculators can afford to continue building shadow stocks that may well prove to be the case, but a shock to demand, a surge in supply or a flattening of the forward curve making financing harder could all knock what looks like somewhat artificially supported market from enduring through next year.
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