LONDON (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)
Where’s the zinc surplus?
The zinc market has been trading the supply surplus story since April, the London price falling from the year-to-date high of $2,958 per tonne to Monday’s three-year low of $2,190.
True, broader macroeconomic concerns have played their part in zinc’s bear retreat but analysts had already placed a collective “sell” sign over a market expected to see increasing availability of surplus metal.
That surplus, however, is currently elusive.
Visible inventories remain extremely low, both on the London Metal Exchange (LME) and the Shanghai Futures Exchange (ShFE).
Production in China is starting to show signs of strong year-on-year growth but the Western component of the global market continues to experience unexpected supply hits.
The transition to surplus is proving surprisingly slow with the tension between expectation and reality playing out in LME time-spreads.
GRAPHIC: Missing zinc surplus - here
LME stocks rose by a net 425 tonnes to 66,000 tonnes on Wednesday thanks to a 1,250-tonne inflow at the Malaysian port of Johor.
It was only the second tranche of arrivals since the start of August and LME inventory has been sliding steadily from its June peak above 100,000 tonnes.
Indeed, “live” tonnage in the LME system, excluding metal earmarked for physical load-out, registered a multi-decade low of 39,200 tonnes on Tuesday.
The visible stocks picture in China has followed a similar pattern.
ShFE stocks rebuilt rapidly from just 27,000 tonnes in January to 124,000 tonnes in the middle of March.
Since then, however, the trend has reversed with Shanghai registered stocks retreating to 72,062 tonnes at the end of last week.
Exchange inventory is only part of the bigger stocks picture but the lack of sustained visible build either in London or Shanghai points to a still-stressed supply chain.
GRAPHIC: Missing zinc surplus - here
Low inventory in China is particularly puzzling given this is where supply does appear to be growing at a fast pace.
National refined zinc production surged by 17% year-on-year in July with run-rates accelerating sharply over the last three months, according to the National Bureau of Statistics.
This dovetails neatly with the zinc market narrative of famine turning to feast as smelters capitalise on better raw materials availability to lift refined metal output.
Yet higher production doesn’t appear to have shifted the Chinese market into appreciable surplus.
Imports of refined zinc are still running at a brisk pace.
Last year’s draw on units from the rest of the world was a record 715,000 tonnes and imports through the first seven months of this year were up again to the tune of 20% at 375,000 tonnes.
July did see a sharp pick-up in exports to 16,526 tonnes, the highest monthly tally since January 2015. But just about all of the flow was categorised by China’s customs department as “entrepot trade”, implying metal passing through bonded warehouses without stopping off in mainland China.
The overall take-away is that the domestic market must be absorbing higher local production given the continued need for imported metal.
Refined metal supply outside of China, meanwhile, continues to be plagued by unexpected hits.
The latest comes from Canada’s Teck Resources, which reported on Aug. 26 “an electrical equipment failure” at its Trail smelter in British Columbia.
Repairs are expected to take up to 20 weeks with a financial hit of $5-10 million and a production hit of 20,000-30,000 tonnes.
This follows the shuttering of Russia’s 110,000-tonne per year Electrozinc smelter after a devastating fire in October last year and the continued outage, also due to fire, of the Mooresboro refinery in the United States.
The 155,000-tonne per year Mooresboro plant was closed in April and owner American Zinc Recycling Corp said last month it was targeting a restart only in the first quarter of next year.
At other times such closures wouldn’t have been sufficient to impact materially the market but in the context of the smelter bottleneck that has prevented improved mine production translating into more metal, they have collectively pushed back the expected supply surge.
The current state of fundamental play was neatly captured by the first-half report of the International Lead and Zinc Study Group (ILZSG).
Demand growth was a meagre 0.3% in the first six months of this year, highlighting the impact of weakness in the automotive sector, a key end-user of zinc in the form of galvanized steel.
But supply has fared worse.
Global mine production rose by 1.8 percent, lagging the ILZSG’s May forecast mine output would rise by 6.2% over calendar 2019.
Global refined metal production actually fell by 0.4%, compared with a forecast of 3.6% growth over the course of the full year.
ILZSG’s assessment is that the global market registered a supply deficit of 134,000 tonnes in the first half of 2019, compared with a deficit of 90,000 tonnes in the same period of last year.
That’s not the sort of headline the zinc market was expecting by this stage of the cycle.
The LME zinc price has bounced from Monday’s low to a current $2,344 but it seems highly unlikely zinc is going to break free of the macro negativity that is depressing all the LME metals with the notable exception of nickel.
Moreover, analysts have not changed their collective bearish take on the market’s underlying dynamics. Indeed, Citi last month downgraded its short-term price target to $2,100 from $2,220 citing a deteriorating demand picture.
Tension between such bearishness on the outright price and the conspicuous absence of a metal surplus is playing out across the LME time-spreads.
The benchmark cash-to-threes spread saw acute tightness in the first half of this year but slipped into contango in July, again conforming to the bear script.
However, it has just flipped back to backwardation, cash commanding a $14-per tonne premium over three-month metal at Wednesday’s close.
There may be more spread volatility in store unless the market starts seeing tangible evidence that the long-awaited surplus has finally arrived.
Editing by Alexandra Hudson