The London Metal Exchange (LME) zinc price jumped to a six-week high last week after Glencore warned of the continuing margin squeeze on its European smelters.
The commodities powerhouse idled part of its Portovesme smelter in Italy at the end of 2021 due to high power prices.
Europe’s power crunch has got much worse in the intervening months after Russia launched what it calls its “special military operation” in Ukraine at the end of February.
What looked at the time like a seasonal power price spike has morphed into structurally higher pricing.
It’s a “very challenging” time to be in the zinc smelting business, Glencore said.
This isn’t really news, but the reminder from one of the market’s biggest operators was enough for the LME three-month price to spike higher to $3,554.50 per tonne, up 26% from its July low of $2,824.50.
Last trading around $3,480, zinc’s fortunes will now depend on whether high power pricing hits production or demand hardest.
Refined zinc production at Glencore’s European operations fell by 47,500 tonnes year-on-year to 350,900 tonnes in the first six months of 2022.
That mainly reflected the idling of the main production line at Portovesme, although the Italian plant’s recycling activities continue for now.
Glencore’s other two European zinc assets – the 165,000-tonne-per year Nordenham smelter in Germany and the 510,000-tonne San Juan plant in Spain – are also still operating, but both are thought to be modulating run-rates around peak energy pricing periods.
A business that in the past generated net earnings (before tax, depreciation and amortisation) of around $300 million “is barely covering itself at the moment”, Glencore’s chief financial officer Steven Kalmin told analysts on the first-half results conference call.
The company’s European custom metallurgical operations generated just $19 million in net earnings in the period, down from $69 million in the first half of 2021.
The problem is that high power prices don’t look like going away any time soon. Indeed, there is the prospect of more trouble to come as Europe heads into the winter months.
The current energy supply and price environment poses a “significant” supply threat given Europe accounts for around 30% of supply outside of China, Glencore said.
Europe’s power woes and a string of smelter problems elsewhere caused global output to slide by almost 2% in the first five months of 2022, according to the latest monthly snapshot from the International Lead and Zinc Study Group (ILZSG).
Physical premiums remain stubbornly high during what is normally a seasonal low point for demand over the northern hemisphere summer holidays.
North European premiums are currently around $450-480 per tonne over LME cash and Italian buyers are paying a bit more thanks to the Portovesme curtailment, according to Fastmarkets.
The U.S. premium is higher still at around $900 based on the mid-point of Fastmarkets assessment.
It’s not just the physical supply chain that remains tight.
LME time-spreads have been volatile since April and the cash premium over three-month metal has just expanded again to $107.25 per tonne as of Monday’s close.
That is attracting metal, with 7,715 tonnes warranted at Singapore last week and a tranche of zinc earmarked for physical load-out re-warranted at the Taiwanese port of Kaohsiung.
But headline stocks of 73,275 tonnes remain historically very low and 32,325 tonnes of that are still scheduled for physical load-out.
Tellingly, there has been no stocks rebuild in either Europe, where LME-registered inventory stands at just 25 tonnes, or in the United States, where all the remaining stocks have been cancelled and are being steadily drawn down.
As energy prices, particularly those in Europe, show no sign of easing as long as the war in Ukraine continues, zinc bulls are on the prowl again.
“The options market is seeing more interest in bullish structures”, according to a Tuesday market note from LME broker Marex, citing particular interest in September calls “with $4k handles”.
Citi warns of a further potential price spike over the northern hemisphere winter if European gas supplies are insufficient to offset disruption to Russian supply. (“Metals Weekly”, June 24, 2022).
However, the flip side of higher power prices is the hit on manufacturing and construction activity, both big users of zinc in the form of galvanised steel.
Even with global refined zinc production falling in January-May, the market generated a supply surplus of 29,000 tonnes, according to ILZSG.
That’s because the group thinks global usage also contracted by 1.7% in the period as Chinese demand succumbed to rolling lockdowns in the first part of the year.
Some sort of Chinese recovery is expected but it will coincide with lower demand elsewhere, particularly in Europe as the power crisis bites not just smelters but downstream manufacturers.
The outlook for metals pricing is “complex”, Glencore said, balancing supply risks and continuing supply-chain disruption against “likely weakening end-use markets ex-China”.
Zinc is a prime example of this complexity, the price ultimately dependent on whether high power prices hurt European demand more than they hurt the region’s smelters.