Cautious optimism for zinc, despite burnt fingers

(Reuters) - Too often in previous years those betting on higher zinc prices have suffered burnt fingers, but for now some are cautiously optimistic that a deficit and falling stocks will buoy prices.

Historically, supplies of the metal -- used to galvanise steel -- go from feast-to-famine as miners ramp up output when prices rise and cut when prices fall.

However, producers are now more wary and are looking for sustainably higher prices to boost and protect profit margins.

"Zinc does come with baggage, it's destroyed a lot of shareholder value. Miners are being careful," said Robin Bhar, metals analyst at Societe Generale.

"But demand is healthy and supplies are falling ... Mines have closed and more are due to close. Overall about a million tonnes of zinc in concentrate will be taken out."

Planned closures include the Century mine in Australia owned by China's MMG and Vedanta Resources' Lisheen mine in Ireland.

Restarts of existing mines such as Teck Resources' Pend Oreille and Trevali's Caribou zinc mine could take up some of the slack. But new projects such as Vedanta's Gamsberg in South Africa will not be producing for a couple of years. 

Zinc prices at around $2,200 a tonne may be high enough for some to contemplate restarting mothballed mines.

"Another $200 or $300 would make a much stronger case," a producer said. "There's plenty of (concentrate) supply at the moment for smelters."

Some are concerned about China's zinc exports, which are climbing. But at 39,489 tonnes between January and March, they are for now a fraction of total demand estimated at nearly 14 million tonnes this year. 

SPIKES AND SLIDES

Ample supply of zinc concentrate can be seen in treatment charges, which have risen to $245 a tonne, a 10 percent gain, from last year. Treatment charges rise with supplies as mining groups compete to find smelters to process their material.

Zinc rose more than 15 percent between November 2013 and July 2014. It fell back about 10 percent to below $2,000 a tonne between July and mid-March.

Since then expectations of a deficit, 145,300 tonne this year according to a Reuters survey, mine closures and falling stocks have pushed prices back up. 

"The deficit will rise. The big question is how stocks of metal and concentrate accumulated in recent years ," said Graham Deller, analyst at consultants CRU. "Century and Lisheen are eventually going to make a difference."

Zinc stocks in LME-registered warehouses at around 486,850 tonnes have tumbled more than 30 percent since last September and compare with levels above 1.2 million tonnes in June 2012.

Data from the International Lead and Zinc Study Group showed producer and consumer stocks of refined zinc at around 1.5 million tonnes in February.

"A deficit will result in a drawdown of inventories," said Andrew Thomas, a zinc analyst at consultants Wood Mackenzie.

Nickel surplus to shrink dramatically this year - INSG

The global nickel surplus will shrink to about 20,000 tonnes this year as an export ban on nickel ore by top producer Indonesia further crimps production in China, the Lisbon-based International Nickel Study Group

 

(INSG) said on Wednesday.

 

Last year's surplus was 120,000 tonnes.

 

"The Indonesian export ban on nickel ore which took effect in January 2014 is expected to reduce further the nickel pig iron (NPI) production in China despite the increase in nickel ore exports from the Philippines," said the industry body.

 

Nickel pig iron is a low nickel content substitute for refined nickel, commonly used by Chinese stainless steel makers.

 

Global demand for nickel is expected to increase to 1.94 million tonnes in 2015 versus 1.87 million in 2014, according to the INSG, while output is expected to shrink to 1.96 million tonnes versus 1.99 million.

 

"An estimated lower GDP increase in China in line with the government goal to achieve a more sustainable and environmental friendly growth (means) primary nickel usage will continue to grow but at a lower rate than in recent years," said the Lisbon-based group.

 

Supplies of nickel reached glut levels in the past few years with inventories in London Metal Exchange-registered warehouses currently near their highest ever levels at more than 434,000 tonnes, according to LME data.

Copper Plunge Continues Despite Chinese Stimulus

Since China unleashed its latest (and greatest since 2008) RRR cut, stock prices have surged amid the liquidity hype. However, perhaps more indicative of the underlying reality of just what good an RRR cut will do to a debt-saturated economy full of weak credits thanks to tumbling asset prices, copper prices have now plunged over 6% in the last 2 days...

But still BTFATH in Chinese stocks...

Charts: Bloomberg

10 Top Nickel-producing Countries

While many expected the nickel price to continue to rise in 2014 on the back of Indonesia’s ban on unprocessed ore exports, it ultimately fell on concerns over rising stockpiles and predictions that the new rules would soften.

Overall, global nickel production decreased slightly in 2014 compared to the previous year (2,400,000 tonnes vs. 2,630,000 tonnes). Similarly, the nickel price fell 12 percent in 2014, according to the US Geological Survey (USGS), and market watchers are divided about what’s in store going forward — some say production will ramp up, while others say the nickel market will turn in 2015.

Here’s a look at the 10 top nickel-producing countries from 2014, as reported by the USGS.

1. Philippines

Mine production: 440,000 tonnes

The Philippines saw a slight decrease in its nickel production from 2013, producing 440,000 tonnes. Even so, the country took advantage of Indonesia’s export ban and stepped in to distribute to China. In fact, the country’s nickel exports to China increased 24 percent in the first 10 months of the year, according to Bloomberg. Much of that came from stockpiles, but the Philippines plans on increasing the number of mines it has, hoping to permanently fill the gap left by Indonesia.

"If Indonesia’s ban goes on we’ll see more new mines in five years,” said Leo Jasareno, director of the Manila-based Mines & Geosciences Bureau. “Nickel will be the darling of mining in the next 10 years.”

2. Russia

Mine production: 260,000 tonnes

Russia also saw a drop in production from 2013, putting out 260,000 tonnes of nickel vs. 275,000 tonnes the previous year. While the Indonesian ban threw a wrench in the works for some companies and end users, Russia had its own export barriers to deal with. According to a 2014 article from the CBC, sanctions limited the country’s exports to the US and UK in light of last year’s tensions between Russia and Ukraine. While that didn’t keep the country from producing, it did shift its focus to Asian purchasers.

"Well, the problem with sanctions is very porous,” said Donald Rumball, a Toronto-based analyst. “If Russia was stopped from selling nickel, what would stop it from selling to China and Indonesia and Vietnam and who else.”

3. Indonesia

Mine production: 240,000 tonnes

Indonesia experienced a drastic cut in production from last year, with its output dropping from 2013′s 440,000 tonnes to just 240,000 tonnes. Most of that drop was due to the country’s export ban on unprocessed ores, which came into effect in January. With the ban, Indonesia is aiming to reap additional benefits from its natural resources by forcing companies to process ore domestically. However, the move led to thousands of job cuts, and economists have warned that the short-term negative effects of the ban will be extremely costly for Indonesia’s fragile economy.

4. Canada

Mine production: 233,000 tonnes

Canada saw mild gains in its nickel production from 2013 to 2014, producing 223,000 tonnes of nickel last year. Like other countries, Canada is looking to the Indonesian ban as a catalyst to increase production, and believes it could benefit not only via output growth, but by also adding jobs to its economy, according to a 2014 report from The Globe and Mail.

"We would have the additional jobs around refining and of course the value added inside the economy would be augmented that much more,” said Peter Hall, chief economist with Export Development Canada.

5. Australia

Mine production: 220,000 tonnes

Australia’s nickel production dropped from 234,000 million tonnes in 2013 to 220,000 tonnes in 2014. However, according to a Platts article from 2014, that decline was expected. The country is currently starting new mines in three states and expects to begin boosting output by 2018.

6. New Caledonia

Mine production: 165,000 tonnes

Like Canada, New Caledonia saw its nickel production gain marginally in 2014, rising from 2013′s 164,000 tonnes to 165,000 tonnes. Caltrac, which is an arm of Hastings Deering, is expanding mining operations in the country and opened a state-of-the-art maintenance facility in October. The new facility has six operational bays compared to two at the previous facility, according to Mining Australia

"We are one of the leading commercial entities in New Caledonia and deeply involved in the business life of the region,” said Michele Verges, Caltrac’s director general.

7. Brazil

Mine production: 126,000 tonnes

Brazil also saw a decrease in nickel production in 2014, falling short of 2013′s 138,000 tonnes. However, as MINING.com notes, companies in the country saw record-hitting increases as the year progressed. For example, Vale (NYSE:VALE), which is a global leader in nickel production, saw an increase of 18.7 percent from the previous year in the third quarter.

8. China

Mine production: 100,000 tonnes

China increased its nickel production in 2014 by roughly 5,000 tonnes compared to its 2013 total. According to Reuters, China is the world’s leading producer of nickel pig iron , which is a low-grade ferronickel used in stainless steel. When the price of nickel ore nearly doubled between February and April, that raised the cost of production for nickel pig iron, as demand for the material stayed low due to overcapacity in China’s stainless steel sector.

9. Colombia

Mine production: 75,000 tonnes

Colombia’s production stayed relatively constant from 2013 to 2014. However, according to Bloomberg, production could have gone differently had a mining strike gone ahead in the country. The action was a response to workers being angry over extended hours. However, the strike was refused by the union in November and mines continued to operate as normal.

"This is something of a knee-jerk reaction from Colombia that a mine strike had been expected, but is no longer going ahead,” said Nic Brown, head of commodities research at Natixis (EPA:KN) in London. “If you take away the potential strike, the picture is not quite as positive as the market thought it was.”

10. Cuba

Mine production: 66,000 tonnes

Cuba also recorded similar levels of nickel production from 2013 to 2014. According to Reuters, the country cut production at one of its two nickel plants last year to focus on maintenance and capital improvements at the facility.

Copper contango returns for 1st time since July as mood darkens

 (Reuters) - The contango in the copper market returned for the first time in nine months on Tuesday, as traders braced for another slug of metal to enter warehouses amid increasing gloom about weak demand from China, the world's top consumer.

The cash price on the London Metal Exchange was at a discount of $2 per tonne to three-month on Tuesday, the first cash-to-three-month contango since July last year, according to Thomson Reuters data.

In January, the backwardation with cash prices at a premium to the forward prices was as high as $84 per tonne.

That premium has lured metal into warehouses, easing the perception of tightness even as one investor has kept a tight grip on the lion's share of available metal even as prices sank.

LME-registered stocks have risen for nine straight months to just under 340,000 tonnes, more than doubling in size since the backwardation first emerged last summer.

Now traders are braced for another slug of metal to enter the system in the next month as spot physical demand deteriorates

It's not clear on Tuesday if that dominant position was still in tact.

The most up-to-date LME-dominant position report shows one holder of cash warrant positions equivalent to between 50 percent and 80 percent of open tonnage. That data relates to Friday's positioning.

With the exception of the cash to May spread, the whole forward curve was in contango on Tuesday for the first time in a year, according to traders.

Swings in spreads further forward were particularly violent as investors who were lending out metal closed out positions as the backwardation disappeared.

"Some borrowed positions were washed out today," said Tai Wong, director of metals trading at BMO Capital Markets in New York.

Lending out metal to buy back at a future date is a profitable bet when the market is in backwardation.

The spread between three-month and the average price for 2018 settled in a contango of $71 on Tuesday, compared with a backwardation of $2 on Monday, he said.

Still, the spreads aren't yet wide enough for merchants to start building stocks, like those seen in aluminum over the past five years or more recently in oil during the market's worst crisis in years.

The cost of financing inventory is about 50 cents a day, which means the cash to three contango would need to flare out to $15 per tonne before it would cover costs.

Will Chinese RRR cuts lift Aluminium, Copper?

The People’s Bank of China (PBOC) will reserve requirement ratio (RRR) by one percentage point, the central bank announced on Sunday.

The monetary stimulus will boost aluminium market, but any price rally should be limited, given the poor market fundamentals, Guoxin Futures told SMM. Guoxin Futures added that power tariff cuts will weaken cost support for aluminium prices, another factor that will arrest sharp price gains.

The recent rise in aluminium prices was aided by China’s pro-growth policies and hopes for more stimulus measures, rather than an improvement of market fundamentals, Hongyuan Futures told SMM. The chronic overcapacity means that this round of RRR cuts will have limited impact on aluminium prices, Hongyuan Futures added. 

Analyst from Guosen Futures agreed with the opinion and told SMM in an interview that the RRR cut will help ease worries triggered by last week’s poor economic releases. “That plus the slower growth in copper inventories during a high demand season will send copper up to 44,500 yuan per tonne, probably heading towards 46,000 yuan.”

“The monetary easing will definitely benefit copper market, and we now see copper to climb to 45,000 yuan per tonne,” chief analyst from COFCO Futures predicts.

However, analyst from Western Futures warned that the easing measures were also a reflection of fragile economy in China. Besides, it may take some time for these measures to produce results. “Thus, we expect copper to meet resistance at 45,000 yuan per tonne.”

Copper’s top 10 – Countries and Companies

Thomson Reuters GFMS today released its Annual Copper survey – Copper 2015 – in which it predicts a continuing copper surplus and a 12% fall in average copper price for the year to $5975/tonne compared with 2014.  The findings and more data from the 88-page report will be covered in more detail in a following article, but here we will just take a brief look at the top 10 producing nations – which between them accounted for 80% of global copper supply last year, and the top 10 producing companies.

Top 10 copper producing nations 2014

Rank 2014	Country	Production (000t)
1.	Chile	5,745
2.	China	1,614
3.	USA	1,368
4.	Peru	1,339
5.	Australia	961
6.	DR Congo	905
7.	Russia	753
8.	Zambia	725
9.	Canada	688
10.	Mexico	522
	Global Total	18,270

Source:  Thomson Reuters, GFMS

As can be seen from the table, Chile remains far and away the world’s largest producer.  In comparison with 2013, the U.S. claimed the No. 3 spot with an 8.5% increase in output, thus moving ahead of Peru where estimated production also rose, but only by 1.4%.  The only other changes in the top 10 were that Russia moved up a place at the expense of Zambia and Mexico moved into 10th spot, replacing Indonesia where output fell due to export restrictions and some labour problems largely at the country’s largest mine – Freeport’s Grasberg.

Top 10 Copper producing companies 2014

Rank 2014	Company	Production  (000t)
1.	Codelco	1,841
2.	Freeport McMoran	1,470
3.	Glencore	1,296
4.	BHP Billiton	1,203
5.	Southern Copper	665
6.	Rio Tinto	636
7.	KGHM Polska Miedsz	506
8.	Anglo American	504
9.	Antofagasta	455
10.	First Quantum	380

Attributable Production.    Source:  Thomson Reuters, GFMS

There was no change in the ranking order of the top 10 copper producing companies with production losses at some operations largely offset with new project production elsewhere.  Overall global new mined production rose around a modest 1.5% with some significant new big operations coming on stream, or ramping up – Codelco’s Hales, Turquoise Hill (51% owned by Rio Tinto)’s Oyu Tolgoi and Chinalco’s Toro Mocho mine in Peru being among the largest.  All of these are still ramping up to full production so should see further significant rises in output again this year.

But the production rises were mostly offset by declining grades at a number of aging copper mining operations, and some closures.  With the copper price likely to remain disappointing this year due to an anticipated continuing production surplus, the incentive for new project development remains muted, apart from those operations already in the pipeline while greenfields exploration activity will also tend to be depressed.  There are a couple of major new projects due on stream this year though – Southern Copper’s Buena Vista mine in Mexico and First Quantum’s Sentinel project in Zambia being the biggest.

A copy of the full 88-page Copper 2015 report, and other GFMS publications, may be requested by clicking on this link.

Sourced: Lawrence Williams of mineweb.com