By Andy Home
LONDON Feb 19 Not so long ago, zinc and lead
were the "ugly sisters" of the London Metal Exchange (LME) base
metals suite, both burdened by consecutive years of surplus and
The peak of the commodities super-cycle has come and gone,
and you'd be hard pressed to discern its passage through the
prism of these two industrial metals. With no spectacular bull
runs such as seen in copper and iron ore, they went through a
long, long period of largely sideways grind.
Sentiment is now changing, particularly for zinc, which is
currently the "belle of the ball" on the LME. Three-month zinc
was the best relative performer last year, an act it is
repeating in the early part of 2014.
This turnaround in fortunes appears to be borne out by the
latest figures from the International Lead and Zinc Study Group
(ILZSG), assessing both markets as shifting to production-usage
deficits in 2013.
It was the first year of lead deficit since 2009 and the
first year of zinc deficit since 2006.
The previous sentence should probably include the word
Right now, the LME "Street" is expressing its bullish views
by playing the two sister metals off against each other, a
relative play that currently favours zinc.
Left to one side, however, is the nagging question of where
all those legacy stocks have gone. It is possible that there is
still an ugly side to both Cinderellas?
DEFICIT ... PROBABLY
ILZSG calculates that the refined zinc and lead markets
recorded a production-usage shortfall of 60,000 tonnes and
20,000 tonnes, respectively, in 2013.
These, it is worth stressing, are marginal outcomes in what
are 13 million and 10.5 million tonne global markets.
Moreover, not everyone is in agreement.
"Disconcertingly, our sources still differ greatly on the
recent market balance," observes Stephen Briggs, an analyst at
BNP Paribas, in a recent research note on zinc ("Zinc
transitioning from rattle to hum," Feb. 12, 2014).
"Wood Mackenzie has world refined demand exceeding
production by over 650,000 tonnes in 2012-13, whereas CRU has a
balance in 2012 and a surplus in 2013, with ILZSG data the other
way round," he explains.
These are the three pillars of fundamental insight into the
zinc market, so the divergence in views is genuinely
Briggs, by the way, takes what he calls "a middle path",
expecting "modest headline deficits to morph into something more
structural by 2016".
The zinc market is a relative beacon of light in comparison
with lead, which has a higher scrap component, in the form of
lead-acid batteries, than any other metal market.
Scrap is a notoriously opaque part of the supply chain, and
shifts in the scrap dynamic have frequently caught the refined
lead market collectively off-guard in past years.
If ILZSG's calculation of zinc deficit is open to
interpretation, as it apparently is, then even more so is any
assessment of marginal deficit in the lead market.
Still at least we can all agree, probably, that both markets
are somewhere along the path from chronic oversupply to supply
They are on the same journey for the same reason, namely the
depletion of some of the world's largest zinc mines, a lack of
replacement supply and problems with the few new mines that are
coming on stream.
China's MMG is the prime example of this
phenomenon. Technical problems have led it to defer its Dugald
River mine, which was intended to be a partial offset against
the closure of the giant Century mine next year.
But it's not the only player facing such issues.
This week problems have arisen at another important new
mine, Perkoa in Burkino Faso. Glencore-Xstrata, which
owns 62.7 percent of Perkoa and needs it to help compensate for
zinc mine closures in Canada, has challenged minority
shareholder and operator Blackthorn Resources over the
Blackthorn has already ceased open-pit operations at Perkoa
and is now considering a number of "schedule, cost and capital
scenarios". One scenario is to place the whole mine on care and
maintenance until the zinc price improves further.
Since the sister metals are normally found in the ground
together, every zinc mine that closes takes out a bit of lead
supply as well.
It's just a case of which market will be first to see mine
supply constraints translate into a metal shortage.
The current LME relative-play betting is on zinc. The
lead-zinc premium has shrunk to around $100 per tonne, the
narrowest it's been since the third quarter of 2012.
Global zinc mine supply growth braked sharply from over 3
percent in 2012 to just 1 percent in 2013. Indeed, mine
production outside of China contracted marginally last year,
according to ILZSG.
Lead mine supply growth also slowed last year but much more
moderately to a still robust 6.4 percent globally.
Zinc's bullish credentials are further enhanced by a more
exciting usage profile. ILZSG calculates that global usage grew
by 7.4 percent last year, outpacing a 4.5 percent rate in the
WHERE HAVE ALL THE STOCKS GONE?
Which is maybe why visible zinc stocks are falling harder
and faster than those of lead right now.
LME-registered zinc inventory fell by 290,000
tonnes, or 24 percent, last year, and at 795,000 tonnes is
already down by another 15 percent so far this year.
LME lead stocks shrunk by 104,000 tonnes, or 33
percent, last year and have also continued sliding this year,
down another 6 percent at 201,875 tonnes.
These downtrends have served to fuel the bull chorus
surrounding both metals' prospects.
But are they true signals? And just where exactly has all
this metal gone?
Neither stocks drawdown fits well with the ILZSG's
assessment of underlying production-usage balance, as shown in
the next two graphics:
LME stock falls last year far exceeded calculated deficits
in both markets.
Indeed, LME lead stock movements have been seriously out of
kilter for the past two years, although the ILZSG figures do
suggest some redistribution to producer stocks.
There is no such suggestion when it comes to the 290,000
tonnes of disappearing zinc. Indeed, total stocks including
ILZSG assessments of industry inventory fell even harder, to the
tune of 314,000 tonnes last year.
Maybe this is just a sign that the ILZSG is under-estimating
the scale of deficit in each market.
Or, maybe, these dramatic movements have had more to do with
the formation of load-out queues by LME warehouse operators.
Exchange stocks of both metals have tended to be
concentrated in what the LME calls its "affected" locations,
particularly New Orleans and Antwerp in the case of zinc and
Vlissingen and Johor in the case of lead.
Surplus zinc and lead flooded into these locations only to
be swiftly cancelled, blocking the departure of other metals. It
has since been leaving daily, the pace of drawdown conforming
with LME rules on minimum (de facto maximum) load-out rates at
This is a headache for the LME, because stocks flows have
lost much of their analytical relevance due to such gaming of
the warehousing system.
But it is also a headache for zinc and lead bulls, leaving a
nagging doubt that surplus metal has merely flowed through the
LME system and is now, once again, gathering dust in off-market
storage waiting to be dumped back into statistical visibility at
a more attractive price.
Not such a pretty scenario for the two new "belles of the