(The opinions expressed here are those of the author, acolumnist for Reuters.) * Zinc stocks, price and time-spreads:* China's refined zinc imports: By Andy Home LONDON, Sept 5 (Reuters) - Where's the zinc surplus?
The zinc market has been trading the supply surplus storysince April, the London price falling from theyear-to-date high of $2,958 per tonne to Monday's three-year lowof $2,190.
True, broader macroeconomic concerns have played their partin zinc's bear retreat but analysts had already placed acollective "sell" sign over a market expected to see increasingavailability of surplus metal.
That surplus, however, is currently elusive.
Visible inventories remain extremely low, both on the LondonMetal Exchange (LME) and the Shanghai Futures Exchange (ShFE).
Production in China is starting to show signs of strongyear-on-year growth but the Western component of the globalmarket continues to experience unexpected supply hits.
The transition to surplus is proving surprisingly slow withthe tension between expectation and reality playing out in LMEtime-spreads.
LOW STOCKS LME stocks rose by a net 425 tonnes to 66,000 tonnes onWednesday thanks to a 1,250-tonne inflow at the Malaysian portof Johor.
It was only the second tranche of arrivals since the startof August and LME inventory has been sliding steadily from itsJune peak above 100,000 tonnes.
Indeed, "live" tonnage in the LME system, excluding metalearmarked for physical load-out, registered a multi-decade lowof 39,200 tonnes on Tuesday.
The visible stocks picture in China has followed a similarpattern.
ShFE stocks rebuilt rapidly from just 27,000 tonnes inJanuary to 124,000 tonnes in the middle of March.
Since then, however, the trend has reversed with Shanghairegistered stocks retreating to 72,062 tonnes at the end of lastweek.
Exchange inventory is only part of the bigger stocks picturebut the lack of sustained visible build either in London orShanghai points to a still-stressed supply chain.
CHINA STILL IMPORTING Low inventory in China is particularly puzzling given thisis where supply does appear to be growing at a fast pace.
National refined zinc production surged by 17% year-on-yearin July with run-rates accelerating sharply over the last threemonths, according to the National Bureau of Statistics.
This dovetails neatly with the zinc market narrative offamine turning to feast as smelters capitalise on better rawmaterials availability to lift refined metal output.
Yet higher production doesn't appear to have shifted theChinese market into appreciable surplus.
Imports of refined zinc are still running at a brisk pace.
Last year's draw on units from the rest of the world was arecord 715,000 tonnes and imports through the first seven monthsof this year were up again to the tune of 20% at 375,000 tonnes. July did see a sharp pick-up in exports to 16,526 tonnes,the highest monthly tally since January 2015. But just about allof the flow was categorised by China's customs department as"entrepot trade", implying metal passing through bondedwarehouses without stopping off in mainland China.
The overall take-away is that the domestic market must beabsorbing higher local production given the continued need forimported metal.
SUPPLY HITS Refined metal supply outside of China, meanwhile, continuesto be plagued by unexpected hits.
The latest comes from Canada's Teck Resources ,which reported on Aug. 26 "an electrical equipment failure" atits Trail smelter in British Columbia.
Repairs are expected to take up to 20 weeks with a financialhit of $5-10 million and a production hit of 20,000-30,000tonnes.
This follows the shuttering of Russia's 110,000-tonne peryear Electrozinc smelter after a devastating fire in Octoberlast year and the continued outage, also due to fire, of theMooresboro refinery in the United States.
The 155,000-tonne per year Mooresboro plant was closed inApril and owner American Zinc Recycling Corp said last month itwas targeting a restart only in the first quarter of next year.
At other times such closures wouldn't have been sufficientto impact materially the market but in the context of thesmelter bottleneck that has prevented improved mine productiontranslating into more metal, they have collectively pushed backthe expected supply surge.
SPREAD TENSION The current state of fundamental play was neatly captured bythe first-half report of the International Lead and Zinc StudyGroup (ILZSG).
Demand growth was a meagre 0.3% in the first six months ofthis year, highlighting the impact of weakness in the automotivesector, a key end-user of zinc in the form of galvanized steel.
But supply has fared worse.
Global mine production rose by 1.8 percent, lagging theILZSG's May forecast mine output would rise by 6.2% overcalendar 2019.
Global refined metal production actually fell by 0.4%,compared with a forecast of 3.6% growth over the course of thefull year.
ILZSG's assessment is that the global market registered asupply deficit of 134,000 tonnes in the first half of 2019,compared with a deficit of 90,000 tonnes in the same period oflast year.
That's not the sort of headline the zinc market wasexpecting by this stage of the cycle.
The LME zinc price has bounced from Monday's low to acurrent $2,344 but it seems highly unlikely zinc is going tobreak free of the macro negativity that is depressing all theLME metals with the notable exception of nickel.
Moreover, analysts have not changed their collective bearishtake on the market's underlying dynamics. Indeed, Citi lastmonth downgraded its short-term price target to $2,100 from$2,220 citing a deteriorating demand picture.
Tension between such bearishness on the outright price andthe conspicuous absence of a metal surplus is playing out acrossthe LME time-spreads.
The benchmark cash-to-threes spread saw acutetightness in the first half of this year but slipped intocontango in July, again conforming to the bear script.
However, it has just flipped back to backwardation, cashcommanding a $14-per tonne premium over three-month metal atWednesday's close.
There may be more spread volatility in store unless themarket starts seeing tangible evidence that the long-awaitedsurplus has finally arrived.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Missing zinc surplus Missing zinc surplus ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Alexandra Hudson)
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