LONDON (Reuters) - Weak output of refined zinc from Chinese smelters is likely to persist longer than expected because of bottlenecks at the country’s smaller metal producers, keeping the market tight and wrong-footing bearish investors.
Some investors have been betting that a rebound of both mined and refined supply this year would weigh on prices.
The net speculative short position in zinc grew last week to its highest level since November 2018, before easing slightly, broker Marex Spectron said in a note on Monday.
The overall industrial metals market has been hit by worries about the trade war between China and the United States, but benchmark zinc prices have been resilient and are the second-best performer on the London Metal Exchange this year.
A global market surplus of 20,000 tonnes of refined zinc is expected in 2019, according to a consensus forecast of analysts polled by Reuters.
Zinc metal output in China, the world’s biggest producer, is forecast to rebound by 5.3% and global levels by 3.6% this year, the International Lead and Zinc Study Group said.
But actual production in China fell 4.4% in the first four months of the year while global production slipped by about 3% in the first two months, the latest available data shows.
Chinese Refined Zinc Output Falls: tmsnrt.rs/2HzZ4j2
Spot Zinc Treatment Charges Soar in Asia: tmsnrt.rs/2HAohdd
LME Benchmark Zinc Spread Tightens: tmsnrt.rs/2HAtQbo
LME zinc price still in positive territory this year despite falling market: tmsnrt.rs/2EvZeWw
“Our view is that the market will remain pretty tight through this year,” said metals strategist David Wilson at commodity trader Freepoint Commodities, which handles both zinc metal and mine output.
“We think the zinc smelter bottleneck issue will last longer than most of the sell-side analysts point to.”
Some analysts expect higher metal output in the second half of the year, noting that mines have been producing increasing amounts of concentrates.
That trend in concentrates, or partially processed ore, has led to a more than threefold jump in treatment charges in Asia over the past eight months.
These charges are the fees paid by producers to smelters to process concentrate into metal. They increase when supply from mines rises or smelter capacity declines.
“In our view, the best indication of a more aggressive ramp-up (of refined metal in China) would be a trend lower in the domestic treatment charge,” BMO Capital analyst Colin Hamilton said in a note.
While the zinc market has a healthy supply of concentrates, they are not being refined into metal because of a lack of capacity at smelters, mostly in China, analysts said.
Citi analyst Oliver Nugent argues that smelter restarts, expansions and new operations will add 500,000-600,000 tonnes of new refined zinc supply this year.
Others, such as Wilson, say that high forecasts fail to take into account about 100 smaller Chinese smelters with combined capacity of about 2 million tonnes, which are facing problems with credit, financing or environmental controls.
The chief executive of zinc producer Nexa Resources, Tito Martins, said he was aware that some experts expect more smelter capacity to be available in China in the second half of 2019.
“But according to our sources, we have not seen that
happening yet,” he said in a results conference call this month.
Declines in inventories and shortages of refined metal have resulted in heavy backwardation in LME zinc spreads. The premium for cash LME zinc over three-month zinc surged to $161 a tonne on Friday, its highest since 1997.
Reporting by Eric Onstad; Editing by David Goodman