The King of Zinc Watches and Waits

Glencore has 500,000 metric tons of idle capacity, and world supply may rebound in 2017.

The year's craziest industrial metal just got crazier.

Shanghai zinc futures hit their highest level in nine years on Tuesday, surging as much as 5.8 percent intraday. On Wednesday, after traders closing out positions pushed three-month contracts on the London Metal Exchange down 6.9 percent overnight, they posted a record drop, giving away all the gains made since last week.


The premium of Shanghai front-month zinc futures over London contracts soared to a record this week

Source: Bloomberg

The dog that hasn't barked here is Glencore Plc. The commodity trader is the king of zinc, accounting for more than 10 percent of global output in a good year. But it's been holding back since late last year, after the slump in prices reduced the profitability of its mines.

How Glencore chooses to dispose of its 500,000 metric tons of mothballed capacity -- equivalent to about 3.7 percent of global zinc output last year -- will be crucial in deciding whether the current run of high prices continues or sputters. If the company promises to continue its policy of watching and waiting in an investor update on Thursday, zinc bulls might do well to cut their positions.

Despite a bumper year for zinc in 2016, there's good reason to be cautious about the outlook. Much of the buoyant pricing has come as a result of withdrawn supply -- not just from Glencore's mines in Australia, Kazakhstan, and Peru, but also from sites like Vedanta Resources Plc's pits in India and Ireland.

Still Short

The world will still not have enough zinc next year, even if mine output rises sharply

Source: International Lead and Zinc Study Group, Gadfly calculations

Note: Total zinc production includes recycling and processing of previously mined concentrates.

Much of that production is due to come back with a vengeance in the years ahead. Vedanta is spending about $2 billion on expanding mine output in Namibia, India and South Africa, and other players such as Mexico's Industrias Penoles SAB de CV are bringing on new rock, even if Glencore remains above the fray.

Global mined zinc supply will increase 5.9 percent next year, after a 5.6 percent decline in 2016 -- comfortably outstripping the pace of demand, which will grow just 2.1 percent, according to the International Lead and Zinc Study Group.

That backdrop helps to explain Glencore's caution. While next year's supply jump will still leave the world short of zinc, the 230,000-ton deficit is less than half the amount Glencore is holding back.

Restoring the lost output would take just a few months, Chief Executive Officer Ivan Glasenberg said on an investor call in August, but that would only happen "at the right time where we believe supply-demand justifies bringing it back into the market."

Until that happens, the zinc boom will be on borrowed time.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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