Metal Bulletin Research: undisciplined market will continue to churn out zinc

Zinc producers rarely act in concert to balance the market as prices fall and demand wanes, Metal Bulletin Research analyst Andrew Cole writes.

Zinc producers rarely act in concert to balance the market as prices fall and demand wanes, Metal Bulletin Research analyst Andrew Cole writes.

And with zinc prices ranging between $1,800 and $2,000 per tonne on the London Metal Exchange, producers in China and the west will continue to churn out material.

In September prices on the LME shifted sharply lower and they have ranged largely between $1,800 and $2,000 per tonne since then. If this was low enough to trigger cutbacks, we should have seen some by now. There have been some reports of closures in China, but this is not evident in the data.

Rather than declining, Chinese refined production rose strongly in September, by 11.6% month-on-month to 452,724 tonnes. It jumped again in October, to 474,000 tonnes, which was the highest level in a year. Although there was a slight pullback in November, the total for the month was only 7,000 tonnes less than October’s high, which is negligible.

On a global basis, it’s the same story.

The latest data from the International Lead and Zinc Study Group (ILZSG) is for October – a month in which prices were 10.5% lower than September’s average and 15.9% lower than the August average.

But what was the producer response to the lower prices?

October actually saw a record high for both mine and refined production globally, according to ILZSG. Monthly average prices were higher in November and again in December; if they did not cut at the lows in October they are unlikely to have cut since then.

We are going to need substantially lower prices before we see serious cuts, either in China or elsewhere. If and when they do happen, China is likely to lead the cuts, as we saw in 2008/2009, but they will also be very quick to lead the restarts as well.

The zinc industry is notoriously undisciplined when it comes to rebalancing the market at times of falling demand.

Rather than headlines noting cutbacks, it’s easier to recall reports of new capacity coming on stream – just in the last few weeks for example, Nyrstar’s Young mine resumed production and Glencore/Blackthorne’s Perkoa hauled its first ore. This is typical in zinc.

Producers’ margins are not being stretched enough yet, and they are still getting decent by-product revenues.

So they will keep churning material out unless prices are much lower than they are now.

If the market gets down to $1,500/600 per tonne, things will certainly be much more interesting.

Andy Cole
acole@metalbulletin.com

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