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Gold/Mining/Energy : ZINC The base metal. News and Views. Symbol Zn -- Ignore unavailable to you. Want to Upgrade?

To: Claude Cormier who wrote (144)	3/8/1999 10:00:00 AM
From: Stephen O	Read Replies (1) \| Respond to of 3270

(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. Metal Bulletin newsroom, London Tel +44 171 827 9977 Fax +44 171 928 6892 New York Tel +1 212 213 6202 Fax +1 212 213 6273