With a 10 percent share of global production, Glencore has a claim to being the Saudi Arabia of zinc. So it’s no surprise that forward contracts in the metal are up the most since 2011 after the company said it’s taking about 4 percent of worldwide supply off the market.
Glencore’s argument is simple: Commodity prices are at unsustainably low levels, and holding back production will help them recover. It’s cutting about 500,000 metric tons of output from mines in Australia, South America and Kazakhstan, compared with just under 14 million tons forecast to be produced globally this year by the International Lead & Zinc Study Group.
If output by the biggest producer was all that mattered to commodity markets, this strategy would have a good chance of success. But it’s rarely so straightforward, as Saudi Arabia is learning to its cost.
One risk is that rival producers simply increase output to take up the shortfall. Another is that consumption falls faster than supply cuts.
There’s already evidence that the raw supply-demand forecasts aren’t telling the whole story about zinc. On the Study Group’s numbers, the global market is set to be about 151,000 tons short in 2015, but prices have still slumped 20 percent this year:
The problem is China, which consumes close to half the world’s zinc and is showing signs of being sated. On a trailing 12-month basis, net imports of the metal used in galvanized steel, brass and sunscreen have declined every month since last July. The market looks so amply supplied that the country briefly became a net exporter in October and November last year, according to customs data:
Glencore is betting this will prove a temporary blip. If China’s 2015 downturn is already bottoming out, as some economic indicators are hinting, industry just needs a touch of hunger to reignite its appetite for zinc.
That’s a bold strategy. On the same logic, Glencore’s February announcement that it was cutting Australian coal production 15 percent should have sent prices soaring. Instead, they’ve fallen about 20 percent.
The more bearish view for commodities is that the slowdown in China’s economy is going to cut demand faster than producers can withdraw supply. Tellingly, zinc prices have closely tracked the Caixin China Manufacturing PMI over the past three years:
You could draw similar charts for copper, aluminum, or iron ore.
If China’s economy is recovering right now, it’s not showing up in indicators of bankers’ sentiment, economic conditions, the building industry, automobile output, or steel production. By shutting down production in an attempt to jump-start the market, all Glencore is doing is leaving money on the table.