(The opinions expressed here are those of the author, a columnist for Reuters.)
* Zinc treatment charge benchmarks: https://reut.rs/39cVt4R
By Andy Home
LONDON, March 25 (Reuters) - This year's benchmark zinc smelter treatment charges have been set at a 12-year high of $299.75 per tonne, according to Fastmarkets.
This is not surprising.
The spot market has swung even higher in recent months as a surplus of mined zinc concentrate works in favour of smelters, allowing them to charge more for converting raw material into refined metal.
As such, the 2020 benchmark conforms with the bear zinc narrative that has been playing out over the last year or so as the global market switches from chronic supply shortfall to abundance.
But there is a sense that this year's benchmark is already a backward-looking indicator as the spread of the coronavirus chills the zinc supply chain, with a growing number of mines closing or reducing operations.
This is a key differentiator with the demand shock of 2008-2009. The supply response then took months to materialise as producers gritted their teeth and struggled on. This time many have no choice but to heed their governments' lockdown orders.
TOP OF THE CYCLE
As reported by Fastmarkets, the benchmark deal was concluded between Canadian miner Teck Resources and South Korean smelter Korea Zinc, the two companies that have historically set the treatment charges for annual shipments.
It represents a sharp increase from last year's benchmark of $245 per tonne and is the highest annual reference point since 2008, when it came in at $300.
Price participation clauses appear to have been dropped this year. That's understandable, given that it requires both sides to agree an anchor point around which price participation can work. Who, right at this moment, can forecast the price of zinc, or just about anything else, over the coming weeks and months?
The question, however, is whether this annual benchmark is actually relevant in such a fast-changing market environment. There are reports that spot treatment charges are already falling fast as ever more global mine capacity is frozen by national lockdowns.
MINES ORDERED TO CLOSE
In terms of the global zinc market the single biggest supply hit so far has come out of India, where the government has ordered a 21-day lockdown.
Hindustan Zinc, with annual production of 690,000 tonnes in 2019, has temporarily halted all operations until March 31.
However, the company is a fully integrated producer with concentrates treated in-house, meaning the closure should on paper have little direct impact on the freely-traded concentrates market.
More significant in terms of smelter supply chains is the part closure of Peru's mining sector.
The country's mines churned out almost 1.5 million tonnes of zinc in both 2017 and 2018. Domestic smelter capacity is limited to Nexa Resources' Cajamarquilla plant, which produced 333,000 tonnes of refined metal in 2018.
The bulk of the country's zinc concentrates are exported, making Peru a key player in global raw materials availability.
The extent of the collective shutdown is still uncertain with some mines, such as the giant Antamina, deemed to be critical and allowed to continue operating.
That said, a cumulative supply-side shock is building, albeit not as fast as the demand shock already roiling zinc and other base metals.
Moreover, these government-mandated closures are likely to be followed by a second wave of price-related closures.
London zinc hit a four-year low of $1,675 last week and has struggled to stage any sustained recovery, last trading at $1,805.
The downtrend has been running since late January, the coronavirus accentuating the existing bear narrative of oversupply.
Analysts at Citi estimate that on the basis of so-called "C2" production costs, meaning cash costs plus depreciation, around 25% of the world's zinc mines are now losing money. ("Metals Weekly", March 25, 2020)
True, the cost curve so beloved by analysts is itself a fast-moving target, particularly right now when oil (energy) inputs are also falling and the dollar is rising, buffering non-dollar producers.
On the debit side for zinc miners, however, is the fact that the two most common by-products of zinc production, lead and silver, are also experiencing bombed-out price levels.
METAL OVERSUPPLY BUT...
Welcome to the new coronavirus world, which is unlike anything metal markets have seen before.
The demand shock rolling around the world in the wake of the virus is similar to that experienced during the Global Financial Crisis a decade ago.
Citi expects the global refined zinc market to record a 500,000-tonne surplus of supply over demand this year, annualising at a higher 1-million tonne surplus in the second half of this year.
That compares with an October 2019 assessment by the International Lead and Zinc Study Group that the global market surplus would be around 200,000 tonnes in 2020.
Citi has just cut its short-term zinc price forecast to $1,650 per tonne, at which stage it would be trading deep into the global cost curve.
However, the growing list of mine casualties, both from lockdown and old-fashioned mine economics, means that a supply response is going to arrive much faster than in previous price slumps.
The bank "conservatively" models 800,000 tonnes of mine production losses over the second half of this year. That's equivalent to around 6% of global output.
"Concentrate shortfalls would affect smelter rates from (the second half of 2020) onwards and we now actually model 2020 as a full-year balanced concentrate market."
If that assessment turns out to be accurate, it would mark a sharp turnaround in zinc's bear narrative. Indeed, Citi suggests that zinc is becoming a medium-term buy as the normal commodity boom-bust cycle is accelerated.
A forecast balanced raw materials market, however, also places a big question-mark against the benchmark deal just negotiated for concentrate deliveries to smelters this year.
A top-of-the-cycle benchmark is a fair reflection of the zinc concentrates market prior to January. But that original script has now been ripped apart by the coronavirus.
The virus has exposed the whole concept of setting market terms that apply for a full calendar year.
It may be time for the zinc supply chain to evolve.
(Editing by Kirsten Donovan)