 "As Glencore falls, it takes zinc with it")
Zinc, used to rust-proof steel used in automobiles and construction, stood as an outlier through months, even as all other minerals and metals were losing value, following the end of a commodity supercycle. The support came because traders found its fundamentals the best among all non-ferrous metals, with deficit in supply the order of the day. This status was lost recently when in one trading session on the London Metal Exchange (LME), zinc skid to a day's maximum limit of five per cent.
But, the price fall to a five-year low, has got much to do with moving inventories to LME warehouses in New Orleans for delivery against short speculative positions. From a low inventory of 426,875 tonnes in August, warehouse stocks climbed to 600,000 tonnes and the shifting site was mostly New Orleans in the US.
It is not left to guessing that Switzerland-based mining and trading giant Glencore, brought to its knees because of big exposure to a slowing Chinese economy and piling of debts approaching $30 billion, is involved in selling zinc and also shifting the metal to LME warehouses in New Orleans. Glencore, an FTSE 100 company which has lost three-quarters of its share value this year, is under pressure to liquidate its inventories of commodities and assets to reduce debts. It might have started taking corrective steps too late. No wonder, it has invited a snub from Investec Securities that its entire equity value could be wiped out if minerals and metal prices remain at current levels. A spokesperson for Investec says, "Miners (Glencore and others) grew hugely to meet the demand from China and borrowed heavily to fund the growth. But, the cost of servicing that debt and the schedule of repayments are really putting companies such as Glencore under the spotlight."
Withering comments like this are also coming from other investment banks and securities firms. Investment banker Jefferies Group says, "The risk now is that if commodity prices fall further and Glencore's credit rating is downgraded to non-investment grade, the cost to fund its marketing business would materially increase. In that lower commodity price scenario, profitability of its industrial business would weaken as well and the balance sheet would be an even greater concern."
Assurances by Glencore's adventurous founder, Ivan Glasenberg, that the company is taking "proactive steps" to deal with the current commodity market condition have failed to convince the market. The company says it will sell its agriculture business at $12 billion to cut debts. Grains being a volatile business at all times, Glencore's valuation of the division might not hold.
Therefore, Glencore will remain under pressure to shed some of its minerals and metals holdings, amounting to $23.6 billion. If the choice is to be between copper and zinc - Glencore has a large presence in both by way of own production and trading - then the latter metal is to feature in liquidation. The company's "own sourced" copper production in 2014 was 1.546 million tonnes (mt) and zinc output was 1.387 mt. It has zinc production facilities in Kazakhstan, Argentina and Peru. Glencore's warehousing wing, Pacorini Metals, owns two-thirds of the 43 sheds in New Orleans. No wonder the bulk of the zinc has moved into Glencore sheds there. Inventory overhang developing in the wake of Glencore liquidating stocks is seen as trigger for the zinc price collapse. Investors who had put their bets on this base metal in the beginning of 2015, anticipating supply to become tighter on some big mine closures, have been caught on the wrong foot.
No doubt, the commodities market has become one of the most difficult conundrums for experts. Beside any selling by Glencore, data for the first seven months of 2015 compiled by the World Bureau of Metal Statistics are all in favour of bears. Chinese zinc production is up and so is world production. But, since the country's steel production is down, its zinc use fell in tandem. What further left a bearish impact on the market was a fall in Chinese imports of zinc up to July to 231,900 tonnes from 420,000 tonnes on a year-on-year basis. At 46 per cent, China has the world's biggest share in use of zinc. From last year's deficit of 142,000 tonnes, the world had a surplus of 219,000 tonnes at July-end. It must have grown since.
