For the first month this year, Spain remained the biggest supplier of refined zinc to China, providing one-quarter of the total of 67,111 tonnes imported in January, according to Chinese customs data.

This means that the inflows into China have not stopped after a 15-fold jump in annual import volumes of Spain-origin refined zinc in 2017. This material was mainly produced by Glencore to fill the gap created by cuts in its zinc output in 2015.

In 2017, a total of 160,715 tonnes of zinc produced in Spain was brought into the East Asian country. While trading was normal in the first half of the year, an unprecedented rise was seen in imports from August to December. Around 150,000 tonnes of zinc ingots surged into the world’s top copper-consuming country in an attempt to capture arbitrage profits.

“There is substantial stock in Spain being shipped to New Orleans [in the United States, and] exported or re-exported to China when premiums are strong. Now, we have abundant stock in Asia. If Shanghai premiums were to return to $150 per tonne, then we would see even more zinc being shipped to China,” a Europe-based zinc trader said.

The import arbitrage window emerged in May, August, September and October last year, according to Metal Bulletin’s calculations. Shanghai SHG zinc premiums surged to $190 per tonne cif in June and August.

While zinc stock levels in Shanghai’s bonded zone have doubled to 216,000-218,000 tonnes over the past 12 months, zinc premiums quietly retreated to an 11-month low at $115-130 per tonne, signaling that there was a good supply of the galvanizing metal.

Some of the Spanish zinc ingot volumes arriving in China were produced more than a decade ago and are typically of a higher zinc alloy, zinc dross content, a Chinese zinc ingot buyer told Metal Bulletin.

“Much of this is off-warrant stock in Spain as well as some of the New Orleans drawdown,” an industry source said.

The principal buyers of these worn-out stocks are zinc traders and zinc alloy makers in China.

Old Spanish zinc sold at a discount in China
“Some Chinese alloy makers are quite used to these Spanish zinc ingots. They don’t have to change their formulas at all. It works particularly well if they have to produce a big bulk of zinc alloys of similar quality,” the China-based zinc ingot buyer told Metal Bulletin.

“They are happy to use them even when [the price] discount to domestic metals is small,” he added.

The discount to fresh materials is in the range of 50-200 yuan ($8-32) per tonne, depending on the depreciation of the old Spanish stock, according to multiple sources. Most downstream users are willing to buy at a discount of 100 yuan per tonne.

The premium for zinc - the extra cost that traders add to the exchange price for immediate physical delivery of the metal - was also heard to be lower for this old Spanish stock.

“Some Chinese buyers were buying old stock last year at a lower premium, about $85 per tonne, versus $105 per tonne for brand-new material from Korea Zinc,” the Europe-based zinc trader said.

“These old ingots from Spain are not being sold on a contract basis. They only appear on the Chinese spot market when an arbitrage window is open,” the China-based source added. “Sellers such as Glencore will ship a bulk amount of zinc to China and sell it to multiple buyers when premiums are high.”

The ingots might have been shipped to China directly from Spain, or may have been sitting in a New Orleans warehouse for a long time.

Glencore sending European zinc to New Orleans
The bulk of the zinc ingots produced in Western Europe - which is home to the world’s largest zinc smelter, San Juan de Nieva in Spain - were delivered into London Metal Exchange sheds in 2011 and 2012.

In 2011, New Orleans attracted several large deliveries of zinc which were widely believed to be from the San Juan de Nieva smelter. For years, Glencore has moved zinc from Spain and Australia to New Orleans to keep the European market tight and keep European premiums high.

The Spanish zinc arriving at New Orleans is usually warranted onto the LME, because it is duty unpaid and thus is unlikely to move out of the free-trade zone into the United States market.

In 2011 and 2012, LME warehouses in New Orleans saw zinc inflows of 174,975 tonnes and 174,475 tonnes respectively.

The LME’s total zinc stocks originating from Western Europe also rose substantially, by 108,025 tonnes and 170,650 tonnes respectively, in 2011 and 2012, exchange data shows.

Over the years, Western Europe-produced zinc stocks have gradually built up their volume dominance in LME warehouses.

Major smelters in Western Europe include Boliden’s Kokkola smelter in Finland, Nyrstar’s Budel smelter in The Netherlands and the same company’s Balen smelter in Belgium.

In March 2017, Western Europe-produced zinc had already taken up 83.7% of the total available LME space of 370,950 tonnes. And 90% of the total LME zinc stock was in New Orleans.

Old zinc stocks heading toward China
Throughout the nine-month strike at the zinc-processing unit in Salaberry-de-Valleyfield, in Quebec, Canada - which ended in November 2017 - old zinc stocks in New Orleans were offered to galvanizers in the US, according to sources.

But US galvanizers, which are key zinc buyers in the country, were not keen to purchase worn zinc stocks.

“A lot of the stock on- and off-warrant in [New Orleans] is very old, it is not attractive to look at, and many [potential buyers] complain about the extra dross,” an industry source said.

Galvanizers prefer instead to buy zinc jumbos, which come in a variety of sizes and specifications. As a result, certain US steel mills requested that zinc alloy makers produce more galvanizing zinc jumbos to fill the supply gap resulting from the strike in Quebec.

“Because of their old age, LME stocks [in New Orleans] will be the last to be drawn down by consumers,” the source said.

In September, as much as 17,000 tonnes of old zinc ingots from New Orleans was on its way to Shanghai, a journey that typically takes 40 days, so as to capture arbitrage profits, several China-based sources told Metal Bulletin.

“It was said to be spot tonnages of old Spanish zinc stocks purchased by a large commodity trader,” a trader source said.