Snap3 May 2018Updated 2 months ago

Wide gap in Zinc TCs reflect market near its turning point

After some delay, the 2018 annual zinc concentrate treatment charges have been agreed down to 15% YoY. The gap from decade lows in spot charges has hit extremes and reflects expectations that mine supply will soon loosen significantly

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Wide gap between annual and spot zinc concentrate treatment charges ($/dmt)

Treatment and refining charges (TC/RC) reflect the fee deducted from the concentrate value by the smelter. Higher TC's mean more profit for smelters and less for miners. The fees reflect the availability of raw materials (concentrate) vs smelter capacities.

Asia Metal, ING Research
Asia Metal, ING Research

Drawn out negotiations reach a close

Nyrstar has today reported the 2018 annual benchmark for zinc concentrate charges at $147/dmt which is a 15% decrease from last years $172/dmt. 

Negotiations have been dragged out for far longer than usual this year given the broad disagreement on this year's fundamentals. Miners have pointed to spot charges that are currently the lowest in over a decade. Indeed compared to the $18/dmt spot charge the gap from the benchmark, even given this recent reduction, is at extremes. Also widely contested, is that zinc smelters only pay for 85% of the contained metal in concentrate, compared to 95% in copper. That status quo stems from historical recovery rates not reflective of today’s smelters, but reports of the miner's attempts to change those terms have once again failed.

Compared to spot terms, and original reports of miners bidding as low as $90/dmt, zinc smelters may have fared better than expected, although the flip side of the argument is that 2018 will very much be a year of two halves as mine supply is expected to rebound considerably. ING identifies +400kt from just new mines/expansions/restarts outside of China (before disruptions, other losses) while others are chasing high grading mine plans while prices are high. 

China's own domestic output expected to rebound between 150-200kt although this will be vulnerable to any repeat health and safety limitations like was seen last year. With the low treatment charges, smelters, (especially in China that tend to buy on the spot), are suffering to turn a profit and there are wide reports of smelters bringing forward maintenance with the hopes of re-starting production when fees get higher. The closing of the SHFE-LME arb, weaker physical premia and weakening outright prices, also curbs revenue to be generated outside of the treatment charges.

This pinch on zinc smelting profits could escalate tightness in years to come as a lack of investment in new smelting capacity is expected to become the next bottleneck. Many are calling for above 90% utilisation rates (unseen since the 90’s) in order try to hit only modest deficits in years to come. Any permanent smelter closures amid the concentrate drought would be very bullish for our further dated zinc projections.

Company Reports, ING Research
Company Reports, ING Research

What tightness? Hardly any LME stock is cancelled and spreads in contango

LME, ING Research
LME, ING Research