NEW YORK, Mar. 1 -- Zinc treatment charges will almost certainly rise this year on the back of a sustained deficit in the concentrates market, industry sources said ahead of next week's American Zinc Association's conference.
Zinc industry participants from around the world are set to convene at this year's AZA Conference from Feb. 28 to March 3 at the Westin Kierland Resort and Spa in Scottsdale, Arizona.
Treatment charges (TCs) -- fees miners pay to smelters to process zinc concentrate into refined products -- are traditionally established at the event.
"You have increasing mine supply, but at the same time, you have got spare smelting capacity. If all of the smelters were operating at full capacity, you would have a 2 million-tonne deficit on the concentrates market, which absolutely is just not going to happen, because there is just not enough concentrate around," said Michael Widmer, metals strategist with Bank of America-Merrill Lynch.
Widmer said the deficit in the concentrates market will be the starting point for the TC negotiations at the conference.
"I wouldn't be surprised to see a contract TC above $200 (per tonne). We could have realized TCs below $230 per tonne, basis a $2,500 zinc price," he said.
There are four variables set in a contract: the negotiated treatment charge, the base market price, and the upscale and downscale escalators from the base price.
Last year, the benchmark was set at $194 per tonne based on a $1,250 a tonne London Metal Exchange zinc price MZN3, with an escalator of 13 percent up to $1,500 a tonne and of 12.5 percent above there.
Nyrstar Chief Executive Officer Roland Junck said Thursday that zinc treatment charges will be higher in 2010 due to current price levels in the market.
Nyrstar (NYR.BR: Quote) is the world's biggest producer of zinc, churning out over 1 million tonnes per year, more than rivals Korea Zinc (010130.KS: Quote) and Xstrata (XTA.L: Quote)
Prices of the metal, used predominantly to galvanize steel to protect against corrosion, stand around $2,200 per tonne, up over 100 percent from their December 2009 low near $1,050. As a result of that price recovery, many operators have begun to ramp up production.
Korea Zinc, the world's No. 2 zinc refinery, is aiming for zinc sales of 458,000 tonnes in 2010, with assumed LME zinc prices at $2,000 a tonne. This estimate is up from 2009 output of 441,000 tonnes.
ZINC FUNCTIONING IN SURPLUS
According to the International Lead and Zinc Study Group, the global zinc market was in surplus of 445,000 tonnes in 2009.
Douglas Horn, analyst with CPM Group in New York, said the market was "still functioning under surplus conditions" and that supply restarts have exceeded the demand rebound.
"Spare smelting capacity and ample inventories floating around the market could translate into lower TCs," he said.
"Concentrate supplies appear much tighter than refined metal at present, especially with the premature smelter restarts flowing through the market. Assuming the miners have the upper hand, TCs could be settled closer to $250 to $280," Horn said, using an LME base price above $2,000.