Shortages, shrinking stocks to energize zinc bulls

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LONDON (Reuters) – Shortages for a fourth year running and historically low stocks of zinc are likely to propel prices of the metal to $3,000 a tonne over coming months, while an end to the U.S.-China trade dispute could spur even more gains.

Benchmark zinc on the London Metal Exchange at around $2,760 a tonne is up around 15 percent since the start of the year, but stands well below the 10-year high of $3,595.50 seen in February last year.

“It’s a story of shortages and depleted stocks, we’re looking for a price rally to at least $3,000, possibly above $3,500,” said Wood Mackenzie analyst Andrew Thomas.

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“If we get a trade agreement between China and the United States, we could go above $3,500.”

(Graphic: China PMI new orders index vs zinc prices link: tmsnrt.rs/2VDyd9Y).

The market for zinc, used to galvanize steel, traditionally goes from feast to famine as high prices incentivise higher production, flooding the market with metal, followed by falling prices and output cuts.

But that pattern broke in October 2015 when Glencore shut 500,000 tonnes of capacity, around one-third of its total, to preserve the value of its “reserves in the ground at a time of low zinc” prices.

Prices have since been boosted by mine closures and cutbacks at other mines and environmental issues in top producer China, which shuttered much capacity.

(Graphic: China zinc output link: tmsnrt.rs/2UkoC7x).

Research firm Antaike says China’s refined zinc output saw its steepest plunge since 2013 last year, partly due to tight raw material supply and longer maintenance periods.

However, supply of feed is rising as can be seen in treatment charges — above $200 a tonne on the spot market from $30 early last year — the price mining companies pay to smelters to have their concentrate turned into metal.

(Graphic: Zinc treatment charges link: tmsnrt.rs/2VDyIAS).

“Even assuming we get robust growth from Chinese smelters, we are still going to see a refined metal deficit in the region of half a million tonnes,” Wood Mackenzie’s Thomas said.

The global zinc market is estimated at around 14 million tonnes this year.

Data from the International Lead and Zinc Study Group (ILZSG) showed a zinc market deficit of 384,000 tonnes last year and shortfalls of 442,000 tonnes and 128,000 tonnes respectively in 2017 and 2016.

“We’re looking for a deficit around 150,000 tonnes this year, that’s even with conservative demand growth expectations,” said ICBC Standard Bank Analyst Marcus Garvey.

“Ultimately the price will be dictated by the macro picture, but I don’t see why we wouldn’t see $3,000 again. Low inventories could mean quite aggressive price moves.”

(Graphic: LME zinc stocks vs prices link: tmsnrt.rs/2UkDBP5).

Zinc stocks in LME approved warehouses near 60,000 tonnes, are about one-quarter of the level in August and the lowest since 2007.

“The seasonal demand pick up in the second quarter has the potential to almost wipe out exchange stocks,” said Citi analyst Oliver Nugent. “The backwardation has resurfaced.”

Backwardation is a reference to the higher price for the cash over the three-month contract, which reached $32 a tonne on Friday from around zero earlier this month, created by concern about short supplies on the LME market.

(Graphic: Zinc cash-to-threes spread link: tmsnrt.rs/2Ulyw8U).

Reporting by Pratima Desai; Editing by Veronica Brown and David Evans

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(C Thompson-Reuters