(Andy Home is a Reuters columnist. The opinions expressed are
By Andy Home
LONDON May 7 Markets are fickle things.
A few months ago zinc was the only game in town among the
base metals traded on the London Metal Exchange (LME). The
market was chasing a bullish story of pending supply shortfall
as some of the world's largest mines reach the end of their
Now, however, metal bulls are shunning the zinc market,
turning their attentions to nickel with its equally compelling
story-line of mine shortfall after the January imposition of a
ban on nickel ore exports by Indonesia.
LME three-month nickel has gained 30 percent, while
three-month zinc has fallen by 2 percent since the start
of this year.
So what has changed to explain zinc's fall from bullish
Nothing, according to Canadian producer Teck Resources
, which in its Q1 2014 results reiterated the bull
argument for zinc.
"We believe the outlook for zinc is the most favourable of
the base metals. With recent and expected closures of a number
of zinc mines, we believe that approximately 1.5 million tonnes
of current zinc mine production will be closed by the end of
2016 in a 13 million tonne per year market."
It's been a long time coming as producers eked the last out
of their aging properties but those mine closures are now
starting to happen.
In Canada Glencore's Brunswick and Perseverance
mines with combined output of 316,000 tonnes in 2012 have gone.
In Ireland Galmoy has also gone and Lisheen will be next,
wiping another combined 350,000 tonnes off the global mine
In Australia the Century mine is totemic of the zinc story.
What is one of the world's largest zinc mines will close around
the middle of next year, which is actually a little earlier than
The underlying bull story, in other words, remains on track.
The issue, though, is one of timing.
Right now, there is no sign of tension in the zinc
Indeed, this year's benchmark treatment terms marked a shift
in favour of smelters over miners, suggesting improved rather
than impaired availability.
At a headline level the fee charged by smelters for
transforming mine concentrate into metal rose to $223.50 per
tonne from $210.50, according to Belgium's Nyrstar, one
of the largest refined zinc producers outside of China.
Factoring in the esoterica of escalators and de-escalators,
the zinc market's convoluted price participation formula, this
year's terms represented a 6-percent improvement on 2013,
Moreover, it told analysts on its Q1 conference call that it
has achieved better terms still on "significant quantities of
The zinc bull story, in other words, remains a slow fuse
affair, in contrast with nickel, where the impact of the
Indonesian ban is thought to be already impacting run-rates in
China's giant nickel pig iron sector.
FOREWARNED IS FOREARMED
That extended time-line, meanwhile, injects an element of
uncertainty into the bull story.
The clock may be ticking for many of the world's best-known
zinc mines but there is already a building reaction.
Teck, for example, followed its bullish exposition on the
zinc market's fundamentals with an announcement it will be
reactivating its Pend Oreille mine in the U.S. state of
Pend Oreille has been on care and maintenance since 2009 but
can be ramped up to its 44,000-tonne per year capacity quickly,
seven months to resume activity and a further five months to hit
Other existing operators are doing likewise. Glencore is
partly offsetting the loss of its Canadian mines by expanding
its Australian operations and bringing on stream new mines such
as Perkoa in Burkino Faso.
Meanwhile, the very strength of the bull narrative is
incentivising the reactivation of long-forgotten mines.
The Caribou property in Canada has a fifty-year history of
stop-start (mainly stop) operations, the previous owner Blue
Note going into administration after being wiped out by the
price collapse of 2008-2009.
A new owner, Trevali Mining, is now working on a
financing package to reactivate the mine with a targeted start
date of 2015.
It is just one of many smaller players looking to capitalise
on the coming zinc rush.
The current analysts consensus is that there will still be
insufficient new or reactivated supply to fill the gap left by
large mines such as Century.
But the mathematics are not set in stone. Rather, they are
price dependent and shiftable, not least in the statistical
black hole that is the Chinese zinc mining sector.
One of the reasons investors are flocking to the nickel
market is because there is no obvious geological replacement for
the loss of nickel ore from Indonesia. The world is not so
constrained when it comes to zinc deposits.
STILL A "SELLER"
While the bull story bubbles beneath the surface in the raw
materials sector, it is obscured by high legacy stocks in the
refined zinc market.
The International Lead and Zinc Study Group assessed the
global refined market as being in deficit last year and is
forecasting another, bigger deficit this year.
Most analysts agree. Out of 14 submitting a market balance
forecast in Reuters' Q2 base metals poll, only four are
LME stock developments appear to bear that out, falling back
to levels last seen in 2011. However, the emphasis should be on
the word "appear" in that sentence.
Zinc has become enmeshed in the LME warehouse queue games,
which have hopelessly compromised visible inventory as any sort
of "true" price signal, a point reinforced by the appearance, or
maybe re-appearance, of almost 150,000 tonnes at New Orleans in
It's interesting that Nyrstar, for example, is cautious
about the outlook for the zinc price over the rest of this year,
citing "uncertainties around the new LME warehouse rules", a
reference to the exchange's proposal, currently on hold due to
an adverse UK High Court judgement, to force faster load-out
from its warehouse operators.
Not that Nyrstar is any less bullish long-term than Teck.
It's just in the short term it remains a "seller" in the form of
continued hedging against the downside.
Extending its operations from last year, it has
price-protected 20,000 tonnes per month in the February-June
2014 period, using a combination of put options and forward
Its actions speak louder than any words. The good times may
be coming for zinc, but they are not here yet.
The hot money appears to agree, which is why it has left
zinc for nickel, a market that promises much more much sooner.
(Editing by William Hardy)