LME zinc prices have jumped over 12% since the lows of early November but are still down about 13% on the year. AEGIS notes that the recent uptick in prices could be tied to a weakening US Dollar, as well as global supply issues. If the USD continues to weaken, and if supply issues worsen, then zinc prices could maintain the recent uptrend. (Percentages as of 12/16/2022 close)
The LME Zinc 3M Select contract last settled at $3,049.50/mt (12/16/2022 close). This contract could be on pace for two consecutive positive monthly closes. This feat hasn’t been achieved since July-August of this year. |
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Despite nearby political protests, zinc and copper mines owned by Freeport McMoran, Southern Copper, BHP, Glencore, and Hochschild Mining are operating normally, according to Peru’s energy society SNMPE. Since then-President Pedro Castillo was impeached and arrested on corruption charges on December 7, deadly protests have blocked highways in Peru’s key agricultural areas, and “battles” have erupted in key urban centers including Lima, Apurimac, Arequipa, Ica, and Trujillo. These protests have fueled concerns that deliveries of semi-processed metal to ports could also be disrupted, according to Bloomberg. The Cerro Verde mine, which is owned by Freeport McMoran, is experiencing some logistical issues with people and supplies, but mining operations continue uninterrupted. Currently, the only known instance of mining disruptions is at the Las Bambas mine. However, the protests at Las Bambas predate the ones that just erupted. Moreover, operations continue at Las Bambas, but semi-processed copper cannot be shipped to the port due to a blockage at the main entrance. Peru is the world’s second-largest miner of both copper and zinc, according to USGS data. (Sources: Bloomberg, USGS) |
Even before the Peruvian issues flared up, there have been problems with the global zinc supply. However, the previous and ongoing issues have centered around smelter production, as opposed to mine production. As we can see, global refined zinc production volumes have whipsawed since the pandemic began in 2020. After the recent peak in December 2020, production has trended lower. The recent drop in production stems from soaring electricity prices in Europe that have forced several smelters to curtail production fully or partially. |
So why are Peru’s issues “potentially bullish” even though the new and ongoing protests have not impeded zinc or copper production? According to Bloomberg reports, nearly $1 billion of copper is “trapped” in storage at the Las Bambas mine due to road blockages. If protests persist or worsen, the production or transport of zinc or copper could be affected. Thus, given that zinc and copper prices are down for the year, this could be a good time for end-users of either metal to hedge future needs. This would allow such an end-user to be “ahead of the game,” should protests interrupt the production or transport of zinc or copper. Consumers can hedge zinc in various ways, as we detail below. Buying swaps or call options are viable strategies, as either would establish a maximum zinc price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. |
