(MB) - Zinc premiums hold despite narrowing forwards 3/5/99 17:6
March 5 (Metal Bulletin) -- In anticipation of a widely-
predicted squeeze on the LME zinc market, physical traders say
they are surprised that premiums for zinc metal have not yet
fallen in reaction to the tightening of the forward spreads.
Zinc's strong fundamentals and the fact that the majority of
warrants for good quality western material are still tightly
held are cited as the main reasons for premiums holding their
own so far.
The zinc cash-to-threes spread has narrowed from $20 per tonne
a month ago to $6-8 on March 4 and tightness in the market is
centred on the April-May dates. The feeling is that the nearby
dates could move into backwardation, with forward dates out
until October running at a back of $5.
The LME's reporting on large positions shows that 30-40% of LME
zinc warrants are held by one prominent trading firm. "The
thing that we cannot fathom here is who is short of zinc? Who
is the squeeze aimed at?" asked a physical trader.
Premiums in Rotterdam for western SHG zinc on a duty-paid basis
were at $50-$60 on March 4 and for Russian metal at flat to $10
over LME. In Trieste, premiums last week were at $5-15 per
tonne duty paid while similar quality zinc in Singapore
incurred a $2-5 premium.
There meanwhile appears to have been some progress in
negotiations over the zinc concentrates treatment charges. As
the international zinc community met in Palm Springs earlier
this week for the American Zinc Assn meeting, it became clear
that the first of the benchmark deals are as good as done.
Senior industry sources indicated that a treatment charge at
the lower end of the $165-170 per tonne range, basis $1,000 had
been agreed in at least one instance, although details remain
hazy.
A reduction of $4-5 per tonne from last year's benchmark of
$185-187 per tonne basis $1,100 (equivalent to $170-172 per
tonne basis $1,000) is now expected to emerge as the consensus
as the meeting continues over the next two days.
It is also understood that changes in the escalators and de-
escalators are likely in some cases with a return to the
traditional escalator of 16 cents per tonne and a de-escalator
of 14 cents per tonne. Rates of 20 cents per tonne and 15 cents
per tonne respectively were agreed in some contracts in 1998.
Despite the apparent downwards movement of the TC, some
smelters continue to talk of a charge above $170 per tonne. One
European smelter said that he had concluded deals for a
"significant tonnage" at above $170 per tonne. However, it is
thought that this smelter has not yet concluded contracts with
the major North American mining groups.
The most noticeable absentees from the annual industry
gathering are the senior bargaining team from Belgium-based
smelter Union MiniŠre. Delegates at the conference said that UM
concentrate buyers decided to stay away as a protest against
the prevalent benchmark system. The European smelter has been
among the major proponents of a move away from the system,
which sees the major deals set the tone for the smaller
contracts.
There is a general dislike for the system throughout the zinc
industry, but most market players accept benchmarking as an
inescapable aspect of the mating season. "People say they don't
believe in the benchmark system, which means they don't want to
accept the terms that have been agreed by other parties," one
miner said. "Everyone uses benchmarks if it supports their
case," an industry observer reflected.
Speaking at the conference, Huw Roberts of Brook Hunt attempted
to give "a balanced view" of the concentrates market. Roberts
said that smelters are unjustified in seeking an improved TC
since in 1998, the combination of a low base TC and the
operation of price de-escalators saw realised TCs fall to the
lowest level ever in real terms. However, he said that it is
doubtful whether miners are in a position to concede.
"The evidence of the past year suggests that miners may be
facing even more difficult conditions than smelters," Roberts
said. Mine production losses in 1998 amounted to 299,000
tonnes, he added.
Roberts said that with zinc prices at about 48 cents per lb and
assuming a TC of $165 basis $1,000, about 5% of mine production
is produced at a loss at the level of direct cash costs. He
said that this puts miners in a similar position to smelters.
"The interests of miners and smelters appear balanced in their
requirement for lower TCs in the case of miners, and higher TCs
in the case of smelters. Our analysis of the situation suggests
that little can be gained by either side pursuing the other for
a significant change in TCs in 1999," Roberts said.
Zinc exports from China should decline over the next few years
as growth in domestic consumption outstrips the rate of
production expansion, according to Metal Bulletin Research.
Metals consultant Daniel Smith said that Chinese smelter
production will rise slowly in the next few years, with annual
average growth of 2% forecast from 1998-2003. "This will take
total zinc production from 1.4m tonnes in 1997 to around 1.6m
tonnes in 2003," Smith said, adding that this is substantially
below the 15.6% growth rate seen over the last six years.
Chinese zinc consumption is expected to grow reasonably quickly
over the next five years, with MBR forecasting an annual growth
rate from 1998-2003 of just over 5%. Smith said that the main
growth area in consumption is likely to be seen in the
galvanizing industry.
Currently, China's consumption patterns differ from those in
the west with galvanizing accounting for only 21% of
consumption, and dry cell zinc batteries accounting for 29% of
the market. However, the growth in the galvanized sheet and
strip business should boost the galvanizing industry and more
than compensate for the downward trends in the markets for
galvanized tube and wire.
Smith said that MBR believes that the worst of the Asian crisis
has already been felt. Smith said that Japan is starting to see
the benefit of recent fiscal stimulations, while the IMF's
support should help the Korean economy turnaround. However,
Smith warned that the turnaround is set to be slow and
therefore forecasts zinc consumption growth in "non-communist
Asia", of about 1% in 1999. However, consumption growth is set
to accelerate from next year onwards, at a rate of 4% per
annum.
Overall in Asia and Australia, he said that he anticipates an
increase in mine production from 2.4m tonnes of contained zinc
in 1998 to 3.5m tonnes in 2003 due to increases expected from
Pillars, George Fisher and Century.
Chinese mine production is forecast to increase by 340,000
tonnes by 2003. Smelter production is set to rise from around
2.9m tonnes last year to 3.5m tonnes in 2003, with the major
increase seen from the new 170,000 tpy Townsville smelter in
Australia and the Onsan Smelter in Korea in addition to the
230,000-tonne increase in Chinese smelting capacity.
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