Increased smelter charges reflect zinc supply

There are some who may need to consult economists and pore over volumes of statistics to gauge the health of the economy. A faster way may be to examine the zinc price.

About 46% of the metal is used for galvanizing; most of the zinc-coated steel goes into car production, and the remainder into construction. Both industries have been bludgeoned by a faltering economy and zinc prices have plummeted as a result.

The large integrated producers have only a few options when it comes to maintaining a stable market, especially when there is an oversupply of concentrates coupled with a downturn in zinc prices.

The most effective option was handed to them by the environmental lobby, specifically the shortage of zinc smelter capacity created by stringent environmental regulations.

Where there were once dozens of smelters, there are now only a handful. And many of these smelters are owned or controlled by the integrated producers. With their smelters, they are able to maintain some balance between supply and demand and they also have a great deal of leeway in establishing the price at which they will accept concentrates from the independents. As a result, if a zinc producer does not have its own smelter, it will be squeezed by high custom-smelting charges and a quota placed on its deliveries when zinc prices are low.

Canada is far and away the world’s largest zinc producer. Slightly more than 1.41 million tons were produced in Canada in 1990. (The Western world total that year was 5.87 million tons, 24% of world production.) The next largest contributor in 1990 was Australia with 1.01 million tons.

Base metal producers are experiencing lean times, especially those that must sell their concentrates to custom smelters. The integrated producers are suffering, too, but ownership of their own smelters provides a cushion that results from a degree of control of the market.

The more optimistic forecasts expect an upward movement in prices by the second half of 1992, predicated on the Western economies emerging from recession.

In the meantime, new mines were opened during 1991 in Australia, Canada, Portugal, Morocco, South Africa, India and Mexico. Production was partly reduced by closures and cutbacks but nevertheless mine production reached record levels.

If the producer does have its own smelter, it may be able to associate itself with other producers, such as Cominco (TSE), Teck (TSE), Metall Mining (TSE) and Australia’s MIM Holdings have done through cross holdings. These four companies represent some of the strongest players in the zinc business, with major smelting and/or mining operations in Canada, Australia and Germany.