LONDON: For a market burdened by almost a million tons of metal sitting in London Metal Exchange (LME) warehouses, zinc has been remarkably resilient of late.
Sure, it's been dragged lower in the cross-complex slide of recent weeks. But in terms of relative performance it is up there with copper and tin, markets in supply-side deficit, rather than down with surplus-stricken underperformers such as aluminum and nickel.
Indeed, it is once again trading at a rare premium to sister metal lead.
It has also, counter-intuitively, seen sporadic front-month tightness. The benchmark cash-to-three-months period was valued at $1.75 per ton backwardation as of Wednesday's close.
That in part is probably down to a dominant long position, sitting on somewhere between 50 and 80 percent of LME stocks.
And in part it may reflect one of those titanic tussles for metal between stocks-financiers that has come to characterize the aluminum market.
The mass cancellation of 113,925 tons of LME-registered zinc showing in this morning's stocks report suggests a recent major switch of ownership.
Such are the new dynamics of the LME market-place thanks to the combination of cheap money and competition between warehouses, many now owned by banks or traders, for rental revenue streams.
Fundamentalist metal bulls must pin their hopes on core underlying narratives, one of China shifting to net importer in the case of aluminum and one of looming supply deficit in the case of zinc.
After all, everyone "knows" that some of the world's biggest zinc mines are going to close over the next couple of years.
The process starts in 2013 with Xstrata's Brunswick and Perseverance mines in Canada and culminates in the 2015 closure of Century, the world's second largest zinc mine, in Australia.
Well, actually, no.
Tucked away in the annual report of Minmetals Resources, Century's owner, is the news that the mine-life has just been pushed back another year to 2016 thanks to "the inclusion of Stage 10 of the mine, which will deliver 6.6 million tons of ore at an average grade of 8.2 percent".
And Minmetal is still working on getting just a little bit more out of an exhausted pit, its Mine Operations Team set to "resume a number of near-mine initiatives for identification of additional feed for the processing plant."
Good news for Minmetal, which has just given itself another year's leeway between Century's closure and the development of its two new zinc prospects.
Between them Dugald River in Australia and Izok Corridor in Canada will replace around 80 percent of the feed lost when Century closes.
A final go-ahead decision on Dugald River is due later this year. If forthcoming the mine could be in operation by 2014.
Izok Corridor is further away. A definitive feasibility study will take between 18 and 24 months to complete.
Less good news for that bullish zinc narrative of pending raw materials deficit, which has just receded a little bit further.
More immediately damaging to the narrative is what is happening right now in the murky world of zinc mine production.
The International Lead and Zinc Study Group (ILZSG) estimates that global mine output surged by 11.4 percent in the first four months of this year.
Just about all the growth is coming from China, where official figures show production rocketing by 22 percent over the year to date. It's a trend that has many analysts scratching their heads, given the weak price environment, which should in theory put a cap on higher-cost Chinese mine production and has certainly affected smelters' run rates and therefore their demand for concentrate.
It is quite possible that this apparent mine surge is actually no more than a statistical quirk. It wouldn't be the first time that Chinese statisticians have changed their methodology without letting the wider world know.
What is more certain is the precipitous drop in China's imports of zinc concentrates.
At 772,000 tons (bulk weight) in January-May they were down by 35 percent on last year and the lowest volume in the first five months of any year since 2007. For whatever reason, higher domestic production, lower domestic smelter demand or a combination of both, China's call on the rest of the world's zinc raw materials is sharply diminished.
The very uncertainty as to what is driving this trend should instill extra caution about that bullish narrative of pending zinc supply crunch.
Chinese mine supply is a known unknown when it comes to forecasting global supply-demand dynamics for any metal. In zinc, though, it's a particularly big known unknown.
Even stripping China out of ILZSG's global mine figures shows production in the rest of the world increasing by 2.5 percent in the first four months of 2012.
And that despite the price hovering around eight-month lows.
Ascertaining exactly where the cost curve bites is no easy matter with zinc, though, given it tends to be produced in tandem with both lead and silver. That means there are at least three moving parts to most zinc mines' production costs.
But wherever the zinc producer pain threshold lies, it is clear we are not there yet.
And until prices fall further, mines will keep producing and smelters will keep on churning out metal to add to that growing mountain of surplus units sitting in LME warehouses. Metals financiers and warehouse companies will rejoice.
Zinc bulls will have to keep the faith with that alluring narrative of future deficit.
It is tangible enough a threat that smelters such as Canada's CEZinc are planning for the worst.
CEZinc's owner, the Noranda Income Trust (NIT), has announced it has started setting money aside for a potential closure of the plant once its existing concentrates supply deal with Xstrata runs out in 2017.
A "wise and prudent" precaution, according to NIT, given the "uncertainty of supply of concentrate post-2017".
Uncertainty, indeed, but maybe, in light of the one-year stay of execution for Century, that should read "post-2018"?
— Andy Home is a Reuters columnist. The opinions expressed are his own.
New turn on the long road to zinc deficit
