COLUMN-Glencore keeps zinc market guessing on capacity: Andy Home

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

* Commodities powerhouse has 500,000 T of idled zinc capacity

* Zinc gains make it this year's best-performing base metal

* Glencore (Frankfurt: 8GC.F - news) biding its time; staggered reactivation possible

By Andy Home

LONDON, Dec (Shanghai: 600875.SS - news) 2 (Reuters) - Glencore is still keeping the zinc market guessing over when the company will reactivate its 500,000 tonnes of idled mine capacity.

Since the Swiss commodities powerhouse first announced its intention to mothball about 4 percent of global capacity in October 2015 the London zinc price has risen from $1,700 a tonne to $2,680 at the time of writing.

True, zinc has been on the same Chinese price rollercoaster as the rest of the metals complex in recent days. But there is accumulating evidence, to quote Glencore boss Ivan Glasenberg, that "tightness is starting to flow through the entire supply chain and is beginning to reach the metal market".

Bringing back half a million tonnes of latent mine capacity would, of course, change that dynamic and Glencore's core position is that it will only do so "at the right time".

By which it means a time when it will not have a negative effect on price or Glencore's profit margins.

In other words, the guessing game continues.

When pressed by analysts on the company's investor day, Glasenberg and finance chief Steven Kalmin gave a slightly more nuanced assessment of when the time might be right.

BIG BANG OR LITTLE BANGS?

The reactivation, Kalmin said, might be staged over a period of time as a way of testing the market.

Each mine, added Glasenberg, could take at least nine to 15 months to reactivate, with the option of bringing them back one by one rather than all together.

No big bang then, just a series of little bangs.

Glencore's cuts have been spread across four mines.

The biggest volume, about 380,000 tonnes of annual capacity, was taken out at the McArthur River and Mount Isa complexes in Australia.

A further 80,000 tonnes was shuttered at the Iscaycruz mine in Peru while Kazakhstan operations accounted for 40,000 tonnes.

It's an interesting series of levers that can be pulled when Glencore deems the time is right.

The company doesn't have to be in too much of a rush either. Its zinc production is already due to rise by 90,000 tonnes to 1.19 million tonnes next year.

That's thanks to higher production at the Antamina mine in Peru, where other joint venture partners have already flagged the shift in sequencing to a zinc-rich part of the deposit.

Glencore's zinc-related costs, meanwhile, have been cut sharply over the past couple of years, from 41 cents per lb ($904 a tonne) in 2015 to a forecast negative 14 cents in 2017.

The shift to negative costs results from net credits from by-products such as lead and gold, as well as favourable foreign exchange movements and operational efficiencies and savings.

TIGHTNESS DOWN THE CHAIN

Glasenberg said that Glencore will keep monitoring the market, particularly global smelter output, before pulling the trigger on restarts.

All are waiting to see tangible evidence that tightness in the raw materials segment of the supply chain is translating into a tighter market for refined metal.

The steady decline in concentrate treatment charges attests to an increasing scarcity of raw material.

So, too, does the drop-off in China's concentrate imports this year -- down 42 percent to 1.54 million tonnes (bulk weight) in the first 10 months of the year. Also worth noting is the sharper 51 percent decline in imports from Australia, where the bulk of Glencore's cuts have taken place.

So far, however, there is little sign of Chinese smelters reducing run rates. Nor have imports of refined metal accelerated, as might be expected if the raw materials crunch were really biting.

Refined zinc imports of 375,500 tonnes so far this year are pretty much flat on year-ago levels.

That said, there are tentative signs of that creeping tightness Glasenberg mentioned.

LME zinc stocks have been drifting lower. At the current 441,500 tonnes the headline figure is down by 20,050 tonnes this year.

Zinc bulls have been caught out by deceptive LME stock movements in the past, but it's noticeable that the last significant inflows took place two months ago.

They came at New Orleans, where metal has been circulating between LME and non-LME sheds for several years, but there is a sense that U.S. port's zinc merry-go-round is slowing.

Physical premiums for refined zinc, meanwhile, are creeping higher.

In Asia, physical zinc is being offered at between $125 and $135 a tonne over LME cash, up by about $20 over the past couple of months, according to LME broker Triland Metals.

Traders are bullish on premiums as they try to position themselves for an expected rise in 2017 terms, Triland said.

GUESSING GAME

Acting as a buffer between the concentrates and refined metal parts of the chain are off-market inventories.

The logical inference is that concentrate inventories have been drawn down, particularly in China, and that refined metal stocks could also be declining.

But without harder confirmation that the market for refined zinc is tightening, Glencore can be expected to hold its fire on restarts.

The most likely scenario is that it will continue to do so at least until next year's benchmark concentrate terms are finalised. This usually happens around the time of the International Zinc Conference in the United States, scheduled for late February.

From then on the guessing game will move up a gear, though Glencore's appears to be leaning towards an incremental phase-in of idled capacity over many months.

Glencore, it's worth remembering, has a point to prove with these cuts over and above its own margin metrics.

It was alone in responding to the zinc price decline of 2015 with major cutbacks, which have undoubtedly played a role in the subsequent price recovery.

But for the policy to be seen to have really worked, Glencore has to complete the second leg of capacity restoration without destroying the price.

That this may prove the trickier part of the exercise is not lost on Glasenberg. "We're going to be very careful," he said. (Editing by David Goodman)