Zinc Smelter Fees to Drop as Tight Supply Spurs Discounts

Zinc-processing fees may fall about 4.3 percent this year as tightening supplies of ore force smelters to offer their services to mining companies at a discount, a Bloomberg survey showed.

The benchmark treatment charge may slip to $200 a metric ton, based on a zinc price of $2,000 a ton, according to the average estimate of 10 respondents surveyed at the International Zinc Conference in Rancho Mirage, California. Macquarie Group Ltd. estimates last year’s processing fee was $209, after adjusting a base price for the metal to $2,000.

Mining companies are negotiating this year’s fees, which generally fall with reduced supply of semi-processed ore, known as concentrate. The benchmark usually is set by deals between smelter Korea Zinc Co. (010130) and mining companies including Teck Resources Ltd. (TCK/B) or Xstrata Plc, said Anthony Young, an analyst at Dahlman Rose & Co. in New York.

“Treatment charges have been coming down, and we assume that will continue if economic growth holds up,” Young, who has a “buy” recommendation on Vancouver-based Teck, said yesterday in a telephone interview. “There’s less concentrate available for the number of smelters, and smelters are saying ‘we’ll charge you less.’”

The price of zinc, used to rust-proof steel, has dropped by more than half since reaching a record in 2006, closing yesterday at $1,982 a ton on the London Metal Exchange. Prices will drop to $1,832 this year, the median of 15 analyst and trader estimates compiled by Bloomberg shows.

More Profit

Nyrstar NV (NYR), the largest producer of refined zinc, urged mine operators last month to give smelters a greater share of profits as treatment fees dwindle. While there isn’t enough concentrate supply to service all of the smelters, once processing is complete, there is “slightly too much” refined zinc, Young said.

Refined-zinc production was 13.06 million tons in 2011 compared with demand of 12.7 million tons, according to a report last week from the International Lead and Zinc Study Group.

Global production will increase 3.7 percent to 13.6 million tons this year, according to Barclays Capital. Mine closures and a steep decline in Chinese production will help curtail supply starting next year, possibly leading to a “concentrate crunch,” Barclays said in a Feb. 16 report.

The market for concentrate will remain tight this year, said Akira Takeuchi, executive officer of the mineral resources division at Sumitomo Corp. (8053), said after a briefing in Tokyo on Feb. 16. The company owns the Bolivian San Cristobal mine, the world’s sixth-largest zinc producer.

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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