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Glencore on offensive as zinc prices recover, China cuts production

Metal News - Published on Thu, 11 Jan 2018

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Asia Nikkei reported that Swiss mining giant Glencore's decision to drastically cut zinc production during a commodity price slump in 2015 is paying off and sending ripples through the market.

The benchmark zinc futures on the London Metal Exchange hit a 10 year high in 2017 due to the tightening supply-demand balance as Chinese demand recovered, while Glencore continued to limit supplies. Now that the company has weathered the slump, it is adopting a more aggressive investment policy.

Back in late September 2015, drops in crude oil and nonferrous metal prices raised credit concerns for Glencore, which had a huge amount of interest-bearing debts. Its share price tumbled, and investors around the world unloaded risk assets such as stocks and commodities in a frenzy dubbed the "Glencore shock."

The mining company was forced to cut output of various minerals and sell off some assets. It has cut zinc ore production by around 500,000 tonnes, or one third of annual output, since 2016.

China's economic recovery started giving Glencore a tailwind. Zinc is mainly used for plating steel products for automobiles and construction materials to prevent them from rusting. China accounts for roughly 40% of global demand, and government-led infrastructure projects helped consumption of galvanized steel plates to surge. China's ambitious Belt and Road initiative has the potential to substantially lift steel demand.

Demand for construction materials and automobiles also grew in Southeast Asia, and steelmakers using zinc are increasing their production. Nippon Steel & Sumitomo Metal teamed up with an Indonesian state-owned steelmaker earlier in 2017 and started operation of a new factory to manufacture high-end galvanized steel plates.

On the supply side, Chinese mines are cutting zinc production.

The Chinese government restricted operations of smaller mines as part of environmental regulations to address serious air pollution. The policy has caused supplies of zinc ore and ingots to fall despite the rapid recovery in demand. In 2017, demand surpassed supply by about 400,000 tonne, and the shortage is expected to continue in 2018.

Zinc features plunged to around USD 1,700 per tonne in the second half of 2015, but the prices shot up 60% during 2016 and kept rising to top USD 3,300 in the latter half of last year.

The business environment has changed dramatically, and Glencore is on the offensive.

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Posted By : Rabi Wangkhem on Thu, 11 Jan 2018
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