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Refinery Squeeze

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January 25, 2008 – Comments (2)

An article on Mining Journal say that refinery charges on zinc concentrate are increasing dramatically.  They were about $300/ton last year and are up 10% to $330/ton and some have even asked for as much as $360/ton. 

This is going to be a double whammy for zinc producers that have already been hard hit by declining metal prices.  Zinc has been projected to be in surplus for 2008 and then there are some mines that are at the end of their mine life closing that should tighten supply for 2009, although those projections do not take into account what a slow down in the world economy will do to the supply and demand.

Hudbay Mineral is fully vertically integrated so they refine their own concentrate and so they are a company that will only take a hit from the declining metal value, and that is a big hit.  Additionally, they've had their profits artificially inflated by tax benefits that are ending, and they are one of the producers with a mine closing in the next year or two. 

Zinifex has taken an enormous hit to their share price.  They have some very nice grades in their mines, however, the decline in zinc prices means their gross revenue potential has declined considerably.  Just a quick glance suggests their earnings should decline by as much as 1/2 to 2/3rds of 2007, provided zinc prices stablize.

Zinc price has declined to the point that some high cost producers may no longer be making ends meet.  Zinc price is down to about $1/lb, far below projections on it for this year, of which the low end tended to estimate about $1.20/lb, and it is only January.  With supply up and LME warehouse levels increasing, zinc is unlikely to average that $1.20/lb. 

One thing about base metals, it is difficult to know the true market as hedge funds have manipulated the price and the warehouse store levels.

2 Comments – Post Your Own

#1) On January 25, 2008 at 3:16 PM, TheGarcipian (32.94) wrote:

Hi D,

I'm a bit confused and am still quite new to the commodities market, so help me get my understanding correct, if you don't mind. The miners supply the smelters (aka, ore refineries) with product, a supply that has (by most accounts) increased to high levels in 2008 because of the great profits being made in 2006 & 2007. Mining companies dig out the ore, crush it and concentrate it to minimize shipping costs and some macro-level impurities. Now, the refineries want to charge their suppliers more money for TC/RC (concentrate treatment and refining charges). I'm sorry, but I thought that's what the smelters are for, to refine the ore into metal. That's part of their business model, part of their costs. So, why are they charging miners (their suppliers) these TC/RC fees? Shouldn't the smelter refineries be charging their clients, not their suppliers? Have I read this wrong?

Any help in understanding this would be appreciated. Also, if you can elaborate on how hedge funds have affected this market, that would be helpful too. It's Friday, and apparently my brain has declared it a Non-Thinking Day. Thanks!

--Gar 

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#2) On January 26, 2008 at 1:48 AM, cluelessmorgan (76.21) wrote:

Gar,

This isn't much of an elaboration but maybe it will help.  In very simple terms, Some Hedge Funds have been taking huge long posiitons on base metals. Also consider the rise of commodity index funds with some holdings in the double digit billions. 

 With the banking fiasco going on, to make up for losses in the real estate/housing sector, Hedge Funds are doing what they were designed for -  Hedging.  They are selling off (base metals for instance) to cover losses in other sectors.  Wih such huge holdings, this mass selling takes the prices down.  I don't know that I would use "manipulating" in a negative sense of the word, but it does manipulate the metals prices when you have huge hedging.  And upwards of $60 billion by one index fund alone is enough to cause significant prices fluctuations, and cause serious imbalances as well.

If new valuations are being used and the old supply/demand valuation is being discarded, you are looking at extreme volatility and uncertainty. And those fluctuations can make this sector very seriously risky.

But...

The good news if you are bullish on base metals over the long run, (see my base metals blog(s) for my position on that) is that you can get some good prices if you wait until the right time period (whenever that is)

The bad news is if the base metals are not long term bullish, you are going to lose big if you buy too soon.  Especially if, like I mentioned, traditional valutions are being discarded or manipulated. ala hedge funds with huge long positions, selling off early, etc.

 For a simple answer on refiners, it could be refiners are upping the charge because of too much stockpile and its their way of saying, stop! (the traditional supply/demand)

I hope that helps a little.

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