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China’s Top Smelters Declare Zinc Production Cuts

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Nov. 24 2015, Published 12:33 p.m. ET

Zinc production cuts

On November 20, China’s top zinc smelters announced that they would cut the zinc production by 500,000 tonnes in 2016. This is a 20% reduction in the total zinc output. It will boost zinc prices. Currently, the prices are at six-year lows.

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Zinc is trading at multiyear lows

Zinc’s oversupply situation has been dragging the prices lower. It hit a six-year low of $1,487.50 per metric tonne on November 19. Since the beginning of 2015, LME 3M Zinc fell by 28% due to oversupply and Zinc’s weaker demand situation. According to the smelters, this step aims to control the oversupply situation. On November 20, LME 3M Zinc rose by 2.3%. It ended the day at $1,566 per metric tonne due to the supply cut news.

Glencore’s production cuts

On October 9, Glencore (GLNCY)—a trading and mining giant—announced plans to cut 500,000 tonnes of zinc output. It’s important to note that there will likely be 100,000 tonnes of reduction in 4Q15. This news skyrocketed zinc prices the next day. The prices reached a single-day rise of more than 10%. Within less than a month, the zinc prices corrected to the levels before the rise. The prices started trending to lower levels. By studying Glencore, the production cuts only temporarily supported the prices. Eventually, the weak global outlook took the driver seat.

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Possible impact

Out of the forecasted global zinc consumption of 14 million tonnes in 2016, the announced 500,000 tonnes is only around 3.5%. With this small amount of production cuts, it’s nearly impossible for the latest cuts to balance the oversupplied zinc market. Copper producers faced a similar situation in August and September. After frequent supply cuts from Glencore, Freeport-McMoRan (FCX), and Asarco (AR) the copper prices continued to fall lower due to oversupply and copper’s weak demand situation.

The uptrend in base metals can be triggered by the positive economic news. It can also be triggered by an increase in the demand from China. This would improve major mining companies’ prices like BHP Billiton (BHP). It would also help the major base metal ETFs like the Power-Shares DB Base Metals Fund (DBB) and the SPDR S&P Metals & Mining ETF (XME).

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