LONDON (Reuters) - Prices of zinc and lead have given up nearly all their gains since Glencore shocked the market with output cuts, as investors realized other producers were happy to fill the supply gap.
That means the market is unlikely to see shortages of zinc and the price rally next year that many bulls had hoped for.
The latest set-back in zinc prices follows disappointment this year as the well-flagged closures of big mines that had run out of ore failed to create shortages as expected amid large inventories.
The benchmark zinc price on the London Metal Exchange (LME) surged 13 percent over two days in the aftermath of Glencore’s announcements on slashing output.
Commodity trader and producer Glencore, the world’s largest miner of zinc ore, said on Oct. 9 it would cut 500,000 tonnes of its zinc production or 4 percent of global supply to help support prices.
Some investors hoped other producers would follow suit, but a few days after Glencore’s statement, Indian rival Vedanta Resources said it had no plans to trim its zinc output since its mines had low costs.
In September, Vedanta said it planned to produce 1 million tonnes of refined zinc and lead in the current 2015/16 fiscal year to the end of March, up 15 percent from 869,069 tonnes in the previous year.
“Investors soured so quickly on the Glencore zinc announcement,” said analyst Edward Meir at broker INTL FCStone. “It was ... feared that other producers could now step in to fill the Glencore void.”
Glencore also made clear its cuts were temporary, so the threat of cranking up those mines also hanged over the market, Meir added.
While some other Western miners have expanded at existing properties, China is expected to play a key role in plugging gaps left by any mine closures, said Alistair Ramsay, research manager at Metal Bulletin Research.
“For every shortfall there might be in the rest of the world, China will find the supply,” he told a recent seminar. “We don’t really see a deficit re-emerging anytime soon.”
Citi analyst David Wilson said Chinese producers would likely boost output if prices recovered. “Twelve Chinese projects that were postponed this year could easily be reactivated,” he said in a note.
The zinc market is expected to have a surplus of 30,500 tonnes in 2016, according to the average forecast of 10 analysts polled by Reuters before the Glencore announcement. [MET/POLL]
A key signal to watch would be the concentrate market, said analyst Nicholas Snowdon at Standard Chartered in London.
“From a fundamental perspective, until there are very clear tightening signals underway, there’s no real reason to get excited about the upside potential.”
Global stocks of concentrate - partially processed ore - were still ample and even after the Glencore cuts, they would still be over 2 million tonnes by the end of 2016, he added.
Editing by David Evans