Glencore zinc output cut to have lasting market impact



Using our integrated market analysis, we gauge the affect on zinc's supply, demand and price balance, as well as the implications for lead. 

Glencore has announced that it will cut 500,000 tonnes (kt) of its annual zinc production in 2016 and, as a consequence, the company's lead production will be reduced by 100kt.

Global stocks of zinc concentrate are sufficient to meet smelter demand for approximately 50 days (1.85 million tonnes of contained zinc) so the 100kt loss of production in the final quarter will have a minimal impact on the market in 2015.

However, assuming the cuts are maintained for the whole of 2016, we expect the accelerated draw down of global concentrate will cause stocks to fall to critically low levels – 30 days of smelter requirement – one year earlier than our base case forecast.

We estimate that of the 500kt of lost production, 80kt would normally have been treated on an integrated basis by Glencore's own smelters, with the balance split equally between Chinese, Asian and European custom smelter markets.

Such a rapid draw down of concentrate stocks will cause difficulties for smelters that are exposed to the custom market, resulting in a 250kt cut in refined production.

Cuts to smelter output will cause a more rapid draw down of global inventories of refined zinc, taking global implied stocks from the base case forecast of 57 days at the end of 2016 to 50. In 2017, stocks will fall to critically low levels (37 days of consumption), one year earlier than the base case forecast.

The announcement immediately caused a sharp rise in the zinc price but if cuts are sustained, we can expect an impact comparable with the cyclical highs achieved in 2006 and 2007 over the next two years.

zinc production and price

The lead market will experience a much more modest effect, with concentrate stocks not forecast to reach critical levels until 2017. This would constrain primary lead production and cause a tightening of the refined market, with stocks falling to 33 days of consumption compared with the base case forecast of 35 days.

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Glencore slashes zinc mine production

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