Glencore inventory sale could sink world zinc prices further

[LONDON] Substantial amounts of base metal zinc could be released onto world markets, weighing further on fast falling prices, as major producer Glencore implements a plan to liquidate some of its commodity inventories to help pay off debt.

The overhang of inventories in London Metal Exchange (LME) storage facilities, which has surged more than 40 per cent since early August, has wrong-footed investors who had earlier this year targeted zinc as a top bet in metals due to closures of big mines that would create shortages.

Zinc, mainly used to galvanize steel to protect against rust in autos and construction, has slumped from being one of the best performing industrial metals earlier in the year to one of the worst due to the inventory change.

"It's been a big shock to the market, this massive flood into the LME warehouses," said Stephen Briggs, metals strategist at BNP Paribas.

But mining and trading company Glencore may add further to a plentiful supply situation after announcing a raft of measures to slash its net debt of US$30 billion.

At interim results last month, Glencore said it was cutting "readily marketable inventories" by US$1.5 billion. Last week it said it was further reducing working capital by an additional US$1.5 billion, partly from liquidating more inventories.

Swiss-based Glencore gave no details about which inventories it was selling off and a spokesman declined to comment.

Glencore had inventories worth US$23.6 billion at the end of June, but financial statements did not provide a breakdown of inventories by commodity. Glencore has operations ranging from metals to coal to grains.

Glencore is one of the world's biggest producers of both zinc concentrate, or partially processed ore, and the refined metal. It increased its overall output of zinc by 12 per cent in the first half of the year to 730,300 tonnes.

"I can't confirm it (Glencore selling metal stocks) ... but it is much easier to liquidate LME (refined) metals than concentrates," Mr Briggs said.

LME zinc inventories MZNSTX-TOTAL have surged 43 per cent to 608,885 tonnes since August 7, with the bulk of metal arriving at warehouses in New Orleans.

Glencore's warehousing unit, Pacorini Metals, dominates activity in New Orleans, owning nearly two-thirds of the 42 depots in the city.

Benchmark zinc on the London Metal Exchange jumped to an eight-month peak of US$2,404.50 a tonne in May, but has since slid nearly 30 per cent to US$1,740.

Analysts said some of the material appearing in LME sheds was probably being shifted from non-LME facilities, but some was also likely to be the result of Glencore selling off stocks.

Glencore, whose biggest refined zinc output is in Europe, would be keen to send material to the United States to keep premiums firm in its key European market, an industry source said.

"They may want to move the inventory off their balance sheet and also provide a bit of a prop, or a floor, to European premiums," said the source, who declined to be named.

Industrial consumers pay a premium or surcharge over the LME cash price for immediate delivery of metals.

The heavy flow of inventories is dampening the impact of the closure of big mines this year, which had been expected to tighten the supply balance and create a deficit.

This year, China-owned MMG is closing its Century Mine in Australia while Vedanta Resources is shutting down its Lisheen Mine in Ireland.

"It's (inventory rises) creating negative sentiment around zinc," said analyst Vivienne Lloyd at Macquarie in London. "The market remains in a technical deficit for refined metals, but the stocks should be able to easily feed any actual shortfall in the marketplace."

REUTERS