EXCLUSIVE: Glencore loses out to Trafigura; world’s biggest zinc deal sliced in 2019

The balance of power in the refined zinc market will shift in 2019 when Trafigura replaces Glencore as the largest offtake partner of Nyrstar.

Glencore will lose access to Nyrstar’s commodity grade zinc in the United States when its seven-year marketing deal with Nyrstar ends in 2018 although it will retain the rights to the smelter’s Australian material, sources with knowledge of the matter told Metal Bulletin.

“On 20 July 2017, Nyrstar and Glencore International AG entered into a new five-year contract for the sale of some of Nyrstar’s commodity grade zinc. This new contract commences on 1 January 2019,” Nyrstar said in a statement to Metal Bulletin.

Nyrstar declined to comment on how much zinc Glencore would secure for offtake and from where. Glencore and Trafigura both declined to comment.

Nyrstar’s European ingot offtake agreements from Budel and Balen are unchanged, Metal Bulletin understands.

Under the terms of the existing deal, Glencore has exclusive marketing rights to all commodity grade zinc produced by Nyrstar at its plants in Clarksville, Tennessee and Hobart, Tasmania. Nyrstar expects the plants to produce 114,000 tonnes and 245,000 tonnes of refined zinc respectively this year.

The current deal, which ends on the December 31, 2018, accounts for 3% of world refined production, making it the biggest of its kind for zinc.

In the consolidated world of industrial zinc production outside of China, the ability to source material in these large volumes can provide control of regional markets, price spreads on exchanges and premiums on physical metal.

Glencore’s loss of Nyrstar’s US offtake should benefit Trafigura, its trading rival and Nyrstar’s biggest shareholder, sources said.

“Trafigura will have a larger offtake with Nyrstar,” a source with knowledge of the negotiations said.

The shift in Trafigura’s favor illustrates how the Geneva-based trader is leveraging its stake in Nyrstar, the world’s leading refined zinc producer, for greater control of regional zinc markets in a similar fashion to how Glencore used its Nyrstar shareholding in the past.

In their negotiations, the world’s two largest base metal traders are vying for more tonnes of zinc, that has doubled in price over two years to 10-year highs over $3,200 per tonne on the London Metal Exchange.

Nyrstar is the world’s second-largest smelter of zinc metal at 1.071 million tonnes in 2015, behind Korea Zinc group at 1.09 million tonnes. The company does not differentiate between commodity grade and alloy refined production in its reports.

Glencore is the third-largest smelter at 1.02 million tonnes and is still one of the world’s two leading miners of zinc despite cutting half a million tonnes of mined production, a move that sparked the recent rally in LME zinc prices.

The International Lead & Zinc Study Group (ILZSG) forecasts global refined zinc production to total 13.53 million tonnes in 2017.

Loosening grip
The waning of Glencore’s influence over Nyrstar’s refined zinc output recalls the concessions that the former had to make regarding its involvement and ownership of Nyrstar when it merged with miner Xstrata in 2012-13.

Glencore has sold zinc from Hobart in Asia-Pacific markets since 2008 after signing an agreement to take 550,000 tonnes of Nyrstar’s commodity grade material worldwide.

The two parties renewed the deal in 2011 until 2018 albeit on reduced terms - Glencore, which was under the European Commission spotlight during its merger with Xstrata, retained the rights to market solely Nyrstar’s US and Australian offtake.

Glencore had the largest individual shareholding in Nyrstar at the time of the renewal of the agreement at 7.8%.

Nyrstar’s European refined production went for the most part to Noble and latterly 150,000 tonnes has been scooped up by Trafigura as part of a concentrates and financing package.

Trafigura gains
Trafigura, which now owns 24.64% of Nyrstar and has executives Jesús Fernandez and Christopher Cox on the smelter’s six-person board, will gain a foothold in the US market via Clarksville, which is the last major zinc ingot refiner in America.

“All of those deals are tied to a bigger concentrates deal - it’s not just a pure metal play…. The bigger money’s in the concentrates - there were middle grounds that were reached on all that included metal,” a second source said.

Glencore is the world’s largest miner and trader of zinc concentrates, with an offtake agreement with top 10 miner Trevali and recently spent almost a billion dollars in acquiring a majority shareholding in Peru’s Volcan.

“It’s important to keep the relationship with Glencore. If Nyrstar doesn’t keep the metal [offtake with Glencore], they don’t have the counter on concentrates and Glencore holds 30% of concentrates worldwide direct or indirect because of the trading side,” one source with knowledge of the deal said.

“They will keep this relationship and Trafi is comfortable with that through board members,” the source added. “It’s a good way to keep everything running and, in the US, most of the material from Tennessee will be sold by Trafi.”

Nyrstar and Glencore engage in swap deals of zinc and lead concentrates between Nyrstar’s mines in Canada and Glencore’s in Australia, multiple sources confirmed.

“The management doesn’t want to depend fully on Trafigura… they prefer to diversify,” a third source said.

Zinc treatment charges, paid to smelters for the costs of processing concentrates to metals, are at their lowest recorded by Metal Bulletin at $25-38 per tonne.

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