Zinc TCs sink to multiyear lows amid Chinese smelters’ increase in Jan orders

Treatment charges (TCs) for spot market zinc concentrates dropped to multiyear lows while Chinese smelters re-entered the market for tonnages in January.

TCs for lead concentrates also remain depressed, with supply shortages restricting the amount of material on offer and traded lots shrinking.

Zinc concentrate TCs dropped $10 per tonne over January to a $10-30 per tonne level. Direct trades were reported to Metal Bulletin throughout that range.

The declining spot TC for both zinc and lead concentrates comes while negotiations for annual contracts begin ahead of the annual International Zinc Association conference in California.

Despite projections during the 2017 event that higher prices would bring out fresh mine supply, the market remains extremely tight, even more so than a year ago.

“I was surprised with China – despite the increase in prices the expansion of production hasn’t been there,” a concentrates trader said.

Instead of announcing large-scale cuts, as had been expected, smelter demand for zinc concentrates remains strong, driven by healthy profits derived from ‘free zinc’ while prices for the metal break fresh 10-year highs.

Closing over $3,472 per tonne for the first time since August 2007, the London Metal Exchange three-month zinc contract has enjoyed an almost unblemished bull run since the start of December last year.

Obtaining roughly 10% of the price by converting 95-97% of zinc bought in concentrates to metal, but paying for 85% as an industry standard, means smelters can supplement earnings lost on a declining TC.

Southern Chinese smelters crank up orders
Higher metal prices lit a fire under demand for concentrates over January, smelters in China ramped up production over the month and in order to take in stock before the Lunar New Year holiday.

In northern China, zinc spot concentrate TCs delivered to a smelter rose 200 yuan ($30) to 4,000-4,200 yuan per tonne on January 26, with restocking largely complete.

Zinc spot concentrate TCs for delivery to southern Chinese smelters, however, remained flat at 3,400-3,600 yuan per tonne on January 26, with supply still tight. Transportation costs have also risen on limited winter availability, several smelters said.

“Stocks at some southern smelters can only support around 15 days of zinc production, so they have to bid TCs at low levels to keep plants running,” a smelting source in China said.

Imports of zinc concentrates into China ratcheted up 21.8% over the course of 2017 to a 2.44 million tonne total, its highest since 2015.

Annual negotiations in focus
Annual discussions between ex-China miners and smelters could be especially tough this year because of expectations that a wall of mine supply will hit the market in the second half of 2018 and release the tight market at present.

Metal Bulletin sources indicate that the first round of negotiations has had miners and smelters involved in setting de-facto benchmark terms over $100 per tonne, apart from on the TC.

Smelters, for their part, are bidding the annual TC up over $200, at a base price of $3,200 per tonne with some escalators and de-escalators.

This is an increase from the $172 per tonne TC agreed in 2017 against a $2,800 per tonne base price and zeroed escalator structure.

“The spot market has never been at these kinds of levels for such a long period but it’s finished, we don’t see any other way than up, it’s just not economically feasible,” a second smelting source said.

Miners are pointing to the spot market, which has averaged a $45 per tonne TC throughout the past year, according to Metal Bulletin data, as a reason for terms to come down.

“It’s ridiculous, the spot market is at $200, when you look at the benchmarks for copper it’s closer to the reality of spot terms,” a mining source said.
Lead terms remain low, but Chinese smelter operating rates tone down in winter

The lead concentrate market has had scant relief for an extremely tightly supplied market.

Metal Bulletin assessed a spot TC range of $10-25 per tonne for both high silver, cif, Asia Pacific and low silver lead concentrates, cif, Asia Pacific, a level unchanged since November.

“In the long term it’s not sustainable I guess. But there’s no new news, it remains extremely tight and you can sell to China at $10,” a second mining source told Metal Bulletin.

In the Chinese domestic market, lead TCs were at 1,200-1,300 yuan per tonne and 1,000-1,200 yuan including VAT on a deliverable basis, respectively, for high-silver lead concentrates and low-silver material, both down 100 yuan from December.

China imported 83,167 tonnes of lead ore and concentrates in 2017, down 9% from a year ago, customs data showed.

“[The decline] was mainly due to the limited availability of lead concentrates,” a concentrates trader source said.

The operating rates of Chinese lead miners and smelters were said to be low in winter, on the back of increased environmental restrictions to control high pollution.

“Environmental inspections have shut down many small and unqualified lead miners and smelters,” a Shanghai-based lead trader said.

The inelasticity of mine supply remains a concern for smelters – few projects are either yielding more lead or are starting up, despite exchange prices trading at their highest since mid-2011 and assessed at $2,552-2,557 per tonne on January 29.

South 32’s full-year 2018 mine production will run at an expected 115,000 tonnes of payable lead while the mines’ ore grades start to deplete, the major miner said. This compares to a production run of 173,000 tonnes in 2016.

Smaller projects such as SSR Mining’s Chinchillas lead, zinc and silver project in Argentina is expected to come on stream shortly and is set to bring 15,875 tonnes of lead or roughly 30,000 tonnes of lead concentrates to market this year.

Still, miners will be looking to lower annual TCs as well as silver refining charges (RCs); with demand for their concentrates that contain byproducts, such as silver, increasing as a general trend over the past year to two years.

“Last year for high silver was $104.70/$1 [TC/RC], over the last 12 months the market has been very much driven by the Chinese and it’s still pretty tight,” the second mining source said.

Julian Luk in London contributed to reporting.

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