COLUMN-Another wobble in the zinc deficit story: Andy Home

(Repeats Oct. 28 item. The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Oct 28 (Reuters) - When Hong Kong-listed miner MMG Ltd released its third-quarter results on Oct. 16, it confirmed that its giant Century zinc and lead mine in Australia would close in the third quarter of next year.

The shuttering of Century, which began operations in 1999, has been long expected. Indeed, it has become totemic of the bull story in zinc, predicated as it is on a shift from structural supply surplus to supply deficit as some of the world's largest mines come to the end of their natural lives.

So you'd think that analysts would be cock-a-hoop that another key part of that story has fallen into place.

But they're not. In fact, MMG's statement has caused something of a collective double-take.

That's because MMG is eking out one more quarter of operations than expected. Which doesn't sound much, but it's enough to have thrown a spanner in most analysts' calculations of zinc raw materials balance next year.

It should also serve as a timely warning that zinc's sparkling bull narrative may not be as robust as it appears.

ONE LAST, LAST GASP

Century won't be the first zinc mine that has struggled on longer than anticipated.

The much-hyped zinc raw materials crunch has been deferred many times over the past few years as operators managed to get just a little bit more out of the ground before the inevitable.

Century itself has been part of that pattern. Right up until that statement earlier this month there was still considerable doubt as to when exactly it would close.

Now (NYSE: DNOW - news) we know. But it's just a little bit later than consensus.

There's nothing sinister here, just a natural desire on the part of MMG, as with any other operator, to get as much value as possible from its aging assets before finally pulling down the curtains.

Indeed, MMG Chief Executive Andrew Michelmore, who was in London for LME Week, explained that the extension was in large part due to nothing more than the weather. Drier weather has allowed a bit more work on a part of the mine that had become unstable during the previous rainy season.

One quarter wouldn't make much difference to most mines but because Century is so big, it means quite a lot more production than anticipated. The new guidance is for something in the range of 350,000-370,000 tonnes of zinc in concentrates.

That's enough, though, according to analysts at Macquarie Bank, to push "the concentrates market projection of a deficit for next year into balance". ("Commodities Comment", Oct. 27)

MARKET REACTION

The market is already reacting to that shift in expectations. Not on the London Metal Exchange, where refined zinc is traded, but in the raw materials segment.

Zinc treatment charges (TCs (LSE: TCSA.L - news) ), payable by a smelter to a miner for concentrate, are a sensitive gauge of the availability or otherwise of raw materials.

They were expected to fall next year from this year's benchmark level of $223 per tonne as smelters competed for a diminishing amount of material.

That's no longer the case, according to Macquarie.

Century's revised guidance, "on top of current softening spot conditions, has seen most of the zinc concentrates players take the view that TCs will rise, with projections between $240-260/t from those with whom we spoke."

Macquarie itself has reversed its own forecast for TCs to fall to the $210 level for 2015 deliveries. It now expects them to rise to "at least $240 per tonne".

CHANGING THE STARTING POINT

None of which is to say old mines won't close. Century itself is proof that they will. Eventually.

But Century's surprise has come at a moment when analysts are starting to question more seriously the starting point from which a move into deficit will take place.

Spot treatment charges, as opposed to the annual ones referenced above, have been rising. Indeed, according to Duncan Hobbs, analyst at Noble Group, speaking at the LME seminar last week, they are close to five-year highs.

That speaks of a well-supplied raw materials market. Quite possibly, a very well-stocked one as well.

Nick Snowdon, analyst at Standard Chartered (HKSE: 2888.HK - news) , estimates that China is sitting on 1.2 million tonnes of zinc in concentrate.

That's a massive amount, three times Century's expected production next year, and significant because China's huge zinc smelter sector should in theory be the most vulnerable to any emerging deficit in the zinc raw materials market.

"Even if our estimates are too high, the point is that Century's closure in Q3 2015 should not be seen as a catalyst for an immediate tightening effect in China". ("LME Week 2014: Base Metals Stalemate", Oct. 28)

ELUSIVE DEFICIT

All of which might seem academic, given the International Lead and Zinc Study Group (ILZSG) has just forecast the global refined zinc market will register a 403,000-tonne deficit this year and another 366,000-tonne deficit next year.

That's not completely left-field given the well-flagged strength of zinc demand for galvanised steel this year, particularly in China.

But China's industrial engine is slowing and, as Noble (NYSE: NE - news) 's Hobbs pointed out in his LME Week presentation, physical premiums for refined zinc have been falling in recent weeks.

Moreover, the ILZSG calculations can be thrown if zinc imported into China has been going to bonded warehouses to act as collateral in the country's shadow financing sector rather than to a manufacturer.

"Invisible" stocks are the bane of all forecasters' lives, particularly when something like the Qingdao port scandal comes along and forces a violent destock. Just look at the nickel market, where this year's early rally has been obliterated by the movement of metal back out of China to LME warehouses.

Something similar may be starting to happen with zinc. China's net imports of 3,400 tonnes in September were the lowest since December 2008.

Exports, or maybe that should read re-exports, have accelerated. At 56,600 tonnes over July-September, they are running at the highest level since 2007, the year China introduced an export tax on refined zinc.

Apparent deficit in the refined zinc market, in other words, may be very deceptive. Just how deceptive we may be about to find out if that Chinese export trend continues.

The real bull story in zinc was always and still is the shift to raw materials deficit.

Which has just been deferred, again, by Century's extra quarter of production. (Editing by Dale Hudson)