The Deepening Deficit That Makes #Zinc One of 2016’s Top Bets - Bloomberg

Zinc Surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that's refined to produce the metal, just as demand rebounds in China

The Deepening Deficit That Makes Zinc One of 2016's Top Bets

The Chinese smelters that churn out more than 40 percent of the world's zinc may cut production for the first time in four years because they can't get enough raw material, further lifting prices of one of this year's strongest-performing commodities.

Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that's refined to produce the metal, just as demand rebounds in China, the biggest user. Banks from Goldman Sachs Group Inc. to Macquarie Group Ltd. see further gains, while Glencore Plc, the biggest miner of the metal, says structural deficits are back.

The zinc market is feeling the effects of last year's 26 percent collapse in prices that prompted miners including Glencore to trim output and, in some cases, shut down production altogether. Macquarie estimates that supplies of concentrate will shrink 8 percent this year with consultant CRU Group forecasting the biggest shortage on record. Smelters will need to compete to secure the dwindling supply of concentrate by reducing the fees they charge miners to turn it into zinc, and that may prompt some to curb refining, according to SMM Information & Technology Co.

"Most smelters won't be able to hold production levels now if processing fees shrink further," said Liu Weijie, an analyst at Shanghai-based consultant SMM.

Supply Deficits

Production of refined zinc in China is set to drop about 6 percent in 2016 from a year earlier to 5.65 million metric tons amid the biggest shortage in supply of mined concentrate on record, according to Dina Yu, a Beijing-based analyst with CRU Group. The deficit will be 910,000 tons, in terms of metal contained in the ore, pushing domestic smelting fees to the lowest in almost two years, data from SMM Information & Technology show.

Spot fees for domestic mine output declined to 5,200 yuan ($790) a ton of contained metal in May, the lowest since July 2014, SMM data show. Charges for imported ore have dropped to the lowest since 2012, according to the CRU's Yu.

Smelters are also being squeezed from outside China. Purchases of foreign concentrate shrank to the lowest since 2014 in April and are down 17 percent in the first four months from a year earlier, according to customs. "Foreign miners are prioritizing supplies to their own refiners, leading to a big drop in shipments to China," said SMM's Liu. By contrast, refined-zinc imports jumped 65 percent in the first four months from a year earlier, customs data show.

Bullish Dynamic

The strongest acceleration in China's infrastructure spending since the global financial crisis and a bottoming in the property market will drive demand, according to Goldman Sachs. A quarter of the metal's consumption in China comes from infrastructure and a significant amount from commercial and residential property uses, the bank estimated in a May 19 report. Zinc inventories in warehouses tracked by the London Metal Exchange have shrunk about 38 percent since September.

Zinc has "by far the most bullish supply side dynamic across the base metals," Goldman Sachs said last month, forecasting the global shortage of refined supply will balloon to 360,000 tons next year from 114,000 tons in 2016. Macquarie predicts an average of $2,313 a ton in 2017, while Glencore sees continuing supply challenges because of scarcity at current prices.

Zinc for delivery in three months climbed above $2,000 for the first time in more than 10 months on Thursday, before trading at $1,985 by 10:45 a.m. in London for a gain of 4.6 percent this week. The metal's return this year makes it the fourth-strongest raw material on the Bloomberg Commodity Index.

Invisible Stockpiles

Some are not so bullish. It may take longer than expected for the emerging concentrates supply crunch to feed through to refined-metal markets, analysts from Citigroup Inc. including David Wilson said in an e-mailed note. Zinc demand has remained muted, and total inventory including metal that's held off-exchange may amount to between 2.5 million tons and 3.5 million tons, or as much as 13 weeks consumption, according to the bank. This is "likely to have a dampening effect on prices," the analysts wrote.

The raw material shortage may mean Chinese smelters fulfill part of a pledge they made in November to cut output by 500,000 tons in 2016 from about 6 million tons last year. That would reverse an increase of 1 percent in the first four months, according to Goldman Sachs estimates. 

An official at China's biggest zinc processor, Zhuzhou Smelter Group Co., who asked not to be identified, was unable to comment immediately because the company was still assessing output. A decline in production would be the first since 2012, statistics bureau data show.

See the article online here: http://www.bloomberg.com/

An Inside Look at the World's Biggest Paper #Gold Market

More gold is traded in London each day than what is stored at Fort Knox (4,176 tonnes). On a higher volume day, amounts closer to total U.S. gold reserves (8,133.5 tonnes) can change hands.



Everything you need to know about the secretive London gold trade, where 5,500 tonnes of paper gold are exchanged each day and spot prices are set.





An Inside Look at the World's Biggest Paper Gold Market

How does the #Gold Business Work?

Here is a brief overview of how the Gold business works. 

How the Gold Business Operates

CNBC

Gold mines produce rough gold, called a dore bar. These bars are typically about 80 percent pure gold. The gold is then sent to a refinery, where it is refined into gold of different forms and purity.

Perhaps the most widely produced gold bars are the London Good Delivery bars. Under rules established by the London Bullion Market Association, LBMA, these bars — the gold standard of the gold world — must be at least 99.5 percent pure gold, weigh between 350 and 430 ounces (most weigh about 400 ounces), and be stamped with a unique serial number, the fineness, and the seal of the refiner.

Who can make these bars?

Only refiners approved by the LBMA. They have to maintain excellent laboratory and production facilities, and there is a proactive monitoring of these refineries on the good delivery list. These are usually the only bars that are used for vaulting and storing purposes by bullion banks.

Up until this point, the gold will likely be owned by the mining company (in some cases a gold bullion bank may finance the mine's activities as well). Once the gold is refined, ownership is often transferred to gold bullion banks.

What happens from there?

Depending on where the gold is mined, it will typically be flown by plane to a bank vault in another country: the U.S., the U.K., Dubai, India, China, Australia, anywhere gold may be needed.

The role of bullion banks.

Bullion banks are the middleman of the gold world. Miners produce gold, but they might not produce it at the same time that consumers want to buy the metal. So the banks play a sort of clearing role: when producers want to sell, they can sell to the bank. When consumers want to buy, they can buy from the bank.

In a sense, a bullion bank does many of the things that a traditional bank does. They provide services to the entire wholesale gold industry: big miners, big consumers such as the jewelry and industrial businesses, central banks, and major investors like ETFs. They supply huge amounts of wholesale metal to the primary consumer markets: China, India, the Middle East, Turkey.

They provide, for example, financing and delivery of the physical metal. So if an Indian manufacturer is making a product in, say, Turkey or Switzerland, gold bullion banks can advance the metal in those locations for them.

The bullion banks provide many different types of trading services as well: spot trading, forwards, options, vaulting, etc.

Setting the price for gold.

The price of gold is determined by supply and demand. There isn't one gold market; there are many. The most important include:

• The primary over-the-counter market, OTC, where the "spot" or cash price of gold is determined, is in London, but there are also OTC markets in New York, Dubai, and even in Turkey. Much of the trading in gold occurs in the over-the-counter market on gold trading desks around the world. What do these desks do? They facilitate trading. They trade gold on behalf of their clients (miners, central banks, ETFs, jewelry and industrial manufacturers, etc.) and in some cases trade for their own accounts. Some clients also want to borrow or lend the physical metal.
  
• The gold futures market, the largest of which is in the United States;
  
• The London fix, which is the primary benchmark price for gold. The purpose of the fixing is to provide a tradable benchmark price.

How the London fix works: There are two daily "fixings", a fix at 10:30 in the morning, and a PM fix at 3 o'clock in the afternoon. The fixing is actually a company, called the London Gold Fixing Limited, and the 5 members of the fixing are HSBC, Deutsche Bank, Barclay's, Societe Generaleand ScotiaMocatta. There is a chairman, and each one of the fixing members has a line to other dealers. Think of it like a pyramid structure: the chairman nominates a price, and the five members pass this information down to their clients, who pass it to other interested parties.

So, for example, a customer could tell one of the fixing members, "I'd like to buy 10 bars at this price, but I won't buy 10 bars at this price; or I'd like to sell 10 bars or 20 bars at this price." So at every point of the fixing process, until the chairman declares the price is fixed, all of the customers down that pyramid have an opportunity to do a transaction.

Eventually each one of the five fixing members declares his interest as either buyer, seller, or no interest. When the members reach a point where there is some equilibrium between buyers and sellers, the chairman will then ask each member to declare the number of bars they want to sell or buy based on the buying and selling interest of their clients, and the chairman will declare the price "fixed."

Why have a fixing at all?

It provides a tradable benchmark price. Where gold is part of a portfolio, you need to have a way to value those assets. The fixing is a price at which buyers and sellers are matched at a particular time of day, and because it's open, transparent and tradable it represents a very credible benchmark price.

There are lots of different gold prices around the world, so why doesn't gold trade at wildly different prices? Because arbitrageurs (often on gold trading desks) step in to buy gold in one place, and sell it in another.

How does it get to the consumer?

While much of the gold supply is vaulted (held for investors like ETFs, or central banks), about half of the world's gold ends up as jewelry.

Let's take the example of India, the largest consumer of gold in the world. A wholesaler in the India market would typically be a bank. They will have a relationship with a bullion bank and say, for example, "I would like 2 tons of one-kilo gold bars at a 99.5 purity level." The bullion bank, if they have that size and purity of gold, can forward it to the Indian bank. If they do not have that type of gold immediately available, but in another form (different size bars, or different purity level), they can forward the gold they have to a refinery who is capable of refining the gold to the specifications the bank requires, and then ship it out from the refinery to the bank in India. The bank will then typically forward the gold (often on consignment) to a major jewelry manufacturer.

Much of the gold used for jewelry is leased. Users borrow gold to avoid the risk that gold prices may move against them. They pay a fee to borrow the gold and the title remains with the bank. Ownership is transferred when a final product is manufactured.

http://www.cnbc.com/id/43974868