Will Glencore Bring Back Zinc Production in 2018?

The world’s largest zinc miner cut its annual production guidance in its latest quarterly report, but market watchers wonder if an increase is coming.

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Glencore (LSE:GLEN) cut its output forecast for zinc and other commodities in latest quarterly production report, published on Monday (October 30).

The world’s largest zinc producer said operational difficulties, maintenance and end-of-mine declines were the main reasons for the cuts, but added that its earnings will not suffer.

The company lowered its 2017 zinc output guidance to 1.1 million tonnes (+/- 15,000 tonnes) from 1.13 million tonnes (+/- 25,000 tonnes) in August.

“Glencore’s third-quarter production figures were weak with numerous one-off issues affecting output,” said analysts at Barclays (LSE:BARC). The firm’s zinc production fell to 256,600 tonnes in Q3, a 9-percent decrease compared to the same period last year.

The diversified miner also raised its trading division’s full-year earnings before interest and tax to between $2.6 and $2.8 billion.

Analysts at RBC Capital Markets said that while Glencore’s production volumes were disappointing, earnings per share were likely to have risen due to strong commodity prices. 

All eyes on Glencore

Two years ago, Glencore decided to cut around one-third of its annual zinc output due to low prices, hoping to reduce the supply glut and push the market into deficit.

As a result of zinc’s strong demand outlook and shrinking supply, the market is now headed for a zinc shortfall of 226,000 tonnes this year, according to the International Lead and Zinc Study Group.

In addition, zinc prices increased significantly after Glencore’s move, and are now up more than 100 percent since the company’s announcement in 2015. In August, prices hit their highest level in a decade and are holding above the $3,000 per-tonne-mark on supply worries.

Other factors, such as China’s environmental crackdown and stockpiles shrinking, have also impacted prices, but speculation as to when Glencore could bring back production continues to be one of the crucial factors in the base metals market.

CEO Ivan Glasenberg has said he will only raise zinc output once he is confident an increase will not drag the market lower. Since the cuts were announced, Glencore’s messaging has been “pretty clear” Colin Hamilton of BMO Capital Markets told the Financial Times.

“They said would bring back supply once the physical market tightened and that’s happened,” said Hamilton, who believes Glencore has “a window of opportunity” to restart production before two new mines — Dugald River in Australia and Gamsberg in South Africa — hit their straps in 2019.

Meanwhile, Vivienne Lloyd, an analyst at Macquarie, said the company will likely bring supply back to the market in small increments starting in 2018. The miner will aim to make the “softest impact possible” on the tighter market it has helped to create, she said.

“Glencore’s aim was to create price support by clearing out surplus inventories,” Lloyd added. “The point wasn’t to see how quickly they could get zinc to $3,000. It was to clean up the market.”

On Monday, Glencore’s share price closed almost neutral in London, at GBX 358.96. LME zinc closed up 1.2 percent, at $3,209.

Do you think Glencore will bring back zinc production in 2018? Let us know in the comments, or by taking the poll below.


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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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