The deepening deficit that makes Zinc one of 2016’s top bets

Bloomberg

The Chinese smelters that churn out more than 40 percent of the world’s zinc may cut production for the first time in four years because they can’t get enough raw material, further lifting prices of one of this year’s strongest-performing commodities.
Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that’s refined to produce the metal, just as demand rebounds in China, the biggest user.
Banks from Goldman Sachs Group Inc. to Macquarie Group Ltd. see further gains, while Glencore Plc, the biggest miner of the metal, says structural deficits are back.
The zinc market is feeling the effects of last year’s 26 percent collapse in prices that prompted miners including Glencore to trim output and, in some cases, shut down production altogether. Macquarie estimates that supplies of concentrate will shrink 8 percent this year with consultant CRU Group forecasting the biggest shortage on record.
Smelters will need to compete to secure the dwindling supply of concentrate by reducing the fees they charge miners to turn it into zinc, and that may prompt some to curb refining, according to SMM Information & Technology Co. “Most smelters won’t be able to hold production levels now if processing fees shrink further,” said Liu Weijie, an analyst at Shanghai-based consultant SMM.

Supply Deficits
Production of refined zinc in China is set to drop about 6 percent in 2016 from a year earlier to 5.65 million metric tons amid the biggest shortage in supply of mined concentrate on record, according to Dina Yu, a Beijing-based analyst with CRU Group.
The deficit will be 910,000 tons, in terms of metal contained in the ore, pushing domestic smelting fees to the lowest in almost two years, data from SMM Information & Technology show.
Spot fees for domestic mine output declined to 5,200 yuan ($790) a ton of contained metal in May, the lowest since July 2014, SMM data show. Charges for imported ore have dropped to the lowest since 2012, according to the CRU’s Yu.
Smelters are also being squeezed from outside China. Purchases of foreign concentrate shrank to the lowest since 2014 in April and are down 17 percent in the first four months from a year earlier, according to customs.
“Foreign miners are prioritizing supplies to their own refiners, leading to a big drop in shipments to China,” said SMM’s Liu. By contrast, refined-zinc imports jumped 65 percent in the first four months from a year earlier, customs data show.
The strongest acceleration in China’s infrastructure spending since the global financial crisis and a bottoming in the property market will drive demand, according to Goldman Sachs.