Andy Home: China a Key Consideration Amid Glencore's Zinc Cuts

Reuters’ Andy Home published an article that looks at Glencore plc’s (LSE:GLEN) recent announcement that it will be cutting 500,000 tonnes of zinc production annually.
He notes that while the market remains concerned about what a slowdown in China might mean, “Glencore has successfully changed the nature of the debate.” For him, the question now is whether Glencore’s output reduction “can change the fundamentals of the zinc market.”
Home states:

But there is, certainly when it comes to zinc, a key unknown here and it’s one that is causing headaches across the base metals spectrum.
The biggest market for Glencore’s Australian zinc concentrates is China.
Imports of concentrate from Australia totalled 780,000 tonnes (bulk weight not metal contained) in the first eight months of 2015, accounting for almost 40 percent of all imported zinc concentrates.
Chinese zinc smelters, it follows, are those most directly impacted by Glencore’s cuts.
But China is itself also a massive producer of mined zinc, although quite how massive is difficult to say given perennial problems with the official statistics.
ILZSG estimates that the country’s mined zinc output rose 11 percent in the first five months of this year and it is forecasting output to rise another 7.8 percent next year.
It’s fair to say that Chinese zinc production, both mined and refined, has consistently surprised on the upside for several years, suggesting there is much more flex capacity in the country than assumed.
What if China simply raises output to offset Glencore’s cuts? That question was posed by Paul Robinson, director of CRU Group, speaking at a Bloomberg event on Wednesday.

That is certainly food for thought, and Home notes that it has been a “running theme” at this week’s LME Week. He concludes:

China accounts for a rising share of global metals production as well as consumption. In extreme cases such as aluminium, it actually produces more than the rest of the world combined.
This reduces the impact of any aluminium smelter closures since China is simply producing more and exporting metal into any supply gap in the rest of the world.
Parts of China’s production base seem curiously inelastic to price weakness, in part because of government support, which reduces the impact of any closures elsewhere.
This may prove to be one of the features that differentiates this down cycle from previous troughs.
Another one, of course, is the existence of an entity like Glencore, which out of a combination of necessity and ideology is implementing production cuts that are unprecedented in previous cycles.
How these two new phenomena play out will determine just how much pain still lies ahead for the metals sector.

Click here to read the full article from Home.