Price participation, which had historically given miners and smelters the ability to share in London Metal Exchange zinc price gains and losses, has been taken out of the contracts by the removal of a base price aspect and zeroing of scales.
The much debated payable rates remain untouched at 85%, several sources confirmed.
The deals mark a 12-year low in headline TCs, the fees paid to smelters for the processing of concentrate into refined metal, and a 14.5% drop from last year’s level of $172 per tonne
, initially settled between Teck and Korea Zinc.
But without a scaled aspect, the value realized by smelters will be the lowest in several decades, sources said.
Nyrstar acknowledged the $147-per-tonne TC level
in their first quarter results released earlier on Thursday May 3 but did not comment as to whether it had indeed signed contracts at this level. Glencore did not respond to requests for comment when contacted by Metal Bulletin.
Teck declined to comment, saying in an emailed response to Metal Bulletin’s questions that their commercial discussions were confidential.
Tightest spot market in years
The drop in annual treatment charges comes at a time when the spot market for zinc concentrates remains tight, with Metal Bulletin assessing spot zinc concentrate TCs basis CIF Asia Pacific
at $15-35 per tonne on April 27, down from $45-60 per tonne a year ago.
Zinc concentrate supply has fallen significantly since the 2015 closure of Century, the world’s largest zinc mine, coupled with cuts to mine supply by Glencore toward the end of that same year, with LME prices trading at seven-year lows of $1,445 per tonne at the time.
Zinc prices have since recovered to decade-highs of $3,550 per tonne in February this year. The higher prices have also brought about a recovery in mining; tailings from the Century mine have been turned into a project with concentrate production capacity set at 507,000 tonnes per year
New Century and several other mine projects will begin commercial production during the second half of this year. The debate over supply moving from extreme tightness to balance this year was a factor in delaying the start of this new production.
“It shows that despite the new supply coming on stream, that the market is going to remain tight and with the market having been in a deficit for two years, the extra production is needed just to help reduce the deficit,” Metal Bulletin Research analyst Will Adams said.
Metal Bulletin Research forecasts a 290,000-tonne refined deficit this year after a 493,000-tonne deficit in 2017.
Price participation out
Price participation, whereby miners and smelters share in the ups and downs of exchange metal prices, has historically been included in contracts.
When included, escalators inflate the TC number by a set percentage in the event of LME zinc prices rising over an agreed base price. De-escalators shrink the TC if the LME zinc prices sink to below an agreed base price.
The removal of a base price, with scales set to zero, means that this aspect will be out of this year’s contracts, but sources wouldn’t rule out the return of this feature in future contracts.
“It doesn’t mean that it cannot be re-introduced,” a source participating in the negotiations said.
Still, smelters will continue to profit from 10-13% of the “free metal” gained from continuing to pay for 85% of metal contained in purchased concentrate. Modern smelters are currently able to capture around 95-98% of metal contained when processing concentrates.
Asian smelters likely to follow
Korea Zinc, the world’s largest custom zinc smelter, has yet to agree with Teck but is expected to follow the benchmark level as are smelters in Japan.
“Conditions have been agreed in principle but they need a signature,” a source in Asia said.
This story was updated at 09.55 am London time to clarify that Nyrstar had acknowledged the $147-per-tonne TC level in their first quarter results, but did not comment on whether it had signed contracts at this level.