LONDON (Reuters) - Hidden zinc inventories are helping to keep stocks low in exchange-approved warehouses and prop up prices, but increasing production is due to hit the market in coming months.
Zinc, mainly used for galvanising steel, has been the best performer on the London Metal Exchange over the past three months, gaining 4.7% versus a 0.3% rise for copper.
Prices have been supported as bottlenecks at smelters this year lasted longer than expected, putting a lid on refined output even as mine production has been growing.
This has been reflected in shortages outside of top consumer China and a slide in inventories in LME-approved warehouses, which have more than halved so far this year to 53,250 tonnes, the lowest in two decades.
Stocks in Shanghai Futures Exchange depots have declined by nearly half to 63,797 tonnes since mid-March.
“We’re in this lingering state of tightness,” said Oliver Nugent, analyst at Citigroup in London.
While smelters are still struggling with mediocre production outside of China, within the country output of refined zinc has been rebounding in recent months.
“There’s a real disparity. There is a loosening story that is already underway in China. It’s a timing question of how long that takes to knock on to ex-China and the LME,” Nugent said.
Refined zinc output in top metals consumer China surged 19% year-on-year in September as smelter bottlenecks have eased.
Smelters have also been taking advantage of strong zinc treatment and refining charges, which miners pay to smelters to process their ore concentrates into metal. Spot levels have soared this yearto the highest in over a decade.
Higher Chinese production is not showing up in exchange warehouses partly because the additional output is being stashed away in private storage facilities, analysts and traders said.
“We’ve been told that the Chinese smelters are producing as much as they can and basically it’s going into off-warrant, private warehouse financing,” said Sucden Financial senior broker Liz Grant.
Warrants are ownership documents for metals stored in exchange warehouses.
“The two largest traders of zinc in the world also have an interest in zinc prices not being on the floor...It would make sense that if they hold stock for any reason, they don’t make it visible,” Macquarie analyst Vivienne Lloyd told a briefing.
Macquarie estimates that at the end of October there were 940,000 tonnes of “invisible” zinc stocks, consisting of inventories in non-exchange warehouses and in the supply chain.
That overwhelms the 117,047 tonnes in LME and ShFE warehouses.
Strong supplies within China have caused the physical zinc premium there to slide.
Rising output at new mines will eventually find its way to the market and pressure benchmark prices, according to consultancy CRU.
Vanessa Davidson, director of base metals research at CRU, told a presentation that about 900,000 tonnes of zinc were due to come online next year, boosting mine production by 7.3% to 13.37 million tonnes.
“We see that the increase in supply next year is both extreme and significant... prices will need to fall significantly from where they are today in order to encourage more price-sensitive cutbacks of production,” Davidson said.
CRU forecasts zinc to average $2,180 a tonne next year, down 13% from the current level of $2,495, while Macquarie’s Lloyd sees prices bottoming out at $2,000-$2,100 going into 2020.
Reporting by Eric Onstad; Editing by Mark Heinrich
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