The zinc market has for years been a story of shattered bullish dreams.
Time after time investors have been lured into the market by promises of supply shortfall and higher prices only to realise they were chasing a mirage.
Mines that were supposed to close always seemed able to eke out a few more years of production.
London Metal Exchange (LME) stocks would spend months declining only for massive tonnages miraculously to reappear, as often as not at the US port of New Orleans.
The LME price for three-month delivery hasn’t made it above $2,400 per tonne for any length of time since 2011. Even though zinc has been a relative out-performer among the base metals so far this year, it is still trading a lowly range either side of $1,900.
So whisper it softly, but there really are signs that the zinc raw materials chain is now starting to tighten up.
But, and there’s always a but in this market, raw materials tightness may take some time to translate into refined metal tightness. The transmission process will depend on two problematic unknowns, namely the amount of stocks in the global supply chain and a certain company called Glencore.
The best way to get a grip on what is happening in the upstream part of the zinc market is to look at treatment charges, which are paid by smelters to miners for transforming their material into refined metal.
If treatment charges are rising, it tells you that smelters can charge more because there is ample supply. Conversely, if treatment charges are falling, it’s a signal that mined concentrates availability is tightening.
And right now, treatment charges are falling. Indeed, the benchmark treatment charge for deliveries this year has slid by 17% to $203 per tonne from $245 per tonne in 2015, according to the first-quarter report from Belgium’s Nyrstar, one of the largest smelting entities in the world.
Beneath the headline figures there’s a weird and wonderful world of “escalators”, “de-escalators” and “free metal”, all of which determine the level of price participation to be shared between miner and smelter.
But it’s the headline figure that really counts and this year’s is the lowest since 2012.
Spot treatment charges have also been falling. Those for imported material into China are currently assessed by Shanghai Metals Market at $120 per tonne, down from $150 at the start of the year and from $200 this time last year.
Sliding charges are one reason why China’s zinc concentrates imports fell by 10% over the first three months of this year. The other reason is that there is less concentrate around.
The International Lead and Zinc Study Group (ILZSG) is forecasting mine supply outside of China to contract by 9.4% this year due to a combination of mine closures and price-related cutbacks.
Some of those big mines that defied for so long predictions of their imminent demise have now finally shut up shop.
The giant Century mine in Australia, for example, milled its very last ore in the first quarter of this year and has moved onto care and maintenance. The fact that Century was still generating concentrates several months after it had supposedly closed is symptomatic of the elastic timeline of the much-anticipated zinc supply crunch.
But closed it finally has after producing 6.5mn tonnes of zinc over its 16-year life. Also now closed is the Lisheen mine in Ireland.
Accentuating such natural atrophy of mine production are the temporary suspensions initiated in reaction to low prices such as Nyrstar’s mothballing of its Middle Tennessee mines.
The single biggest suspension has been the removal by Glencore of 500,000 tonnes of annualised capacity at its Australian, Kazakh and Peruvian operations.
The company reported a 28-percent decline in own-sourced zinc production to 257,100 tonnes in the first quarter of 2016.
There is a broad analysts consensus that the zinc concentrates market is going to move into significant supply-demand deficit this year. The scale of that deficit will depend on the extent that China’s small-scale zinc mine sector can lift production.
ILZSG, for example, is forecasting a 12.4-percent lift in Chinese production. But even if that proves accurate, and there are many analysts who would question whether there is that much flex in China, the Group is still looking at a 1.4-percent fall in global output this year.
The key question is when raw material tightness transitions to refined metal tightness. Much, of course, is going to depend on Glencore, which has cut more production than any other zinc producer.
That suspended mine capacity will at some stage be reactivated but it seems unlikely that a company with such a big stake in the global zinc game is going to snuff out early any rally in the price.
But Glencore itself will be no doubt be sensitive to that other “known unknown” in this market, namely the amount of refined metal that is available to cushion the impact of raw materials shortfall.

*Andy Home is a columnist for Reuters. The views expressed are those of the author.