By Pratima Desai
LONDON (Reuters) - Expectations of deeper production cuts in Europe, shortages and dwindling stocks after high energy costs forced Nyrstar to shut its zinc smelter in the Netherlands have bolstered zinc's price prospects.
Higher prices of zinc, used to galvanise steel, mean higher costs for steel makers and for steel consumers in the auto, construction and infrastructure industries.
Nyrstar's decision to close the Budel smelter drove zinc on the London Metal Exchange spike to $3,819 a tonne on Tuesday, the highest since June 9 and a 24% gain since mid-July. It hit a record $4,896 a tonne in early March.
Prices jumped last week after Glencore, Europe's biggest zinc producer, said high power prices made production "very challenging".
Last year, soaring power prices prompted Nyrstar to cut output by up to 50% at its three European zinc smelters - Budel in the Netherlands, Balen in Belgium and Auby in France.
Budel with capacity to produce 315,000 tonnes will be on care and maintenance from Sept. 1.
"The squeeze on European zinc smelter margins means further cuts in Europe and shortages. Prices are heading up," a portfolio manager at a natural resources fund said.
According to Macquarie analysts, energy accounts for around 80% of the cost of producing zinc in Europe compared with historical averages of 50%.
Europe is estimated to produce up to 15% of global zinc supplies estimated at around 14 million tonnes this year.
But much of this production is loss-making, which already has led to annualised output cuts of 140,000-170,000 tonnes.
"Zinc output losses in Europe have outpaced demand losses. Traders will be forced take metal out of the LME system. This is where it will have the biggest and most immediate impact," said Bank of America analyst Michael Widmer.
Zinc stocks in LME registered warehouses, at 75,000 tonnes, have plummeted by 75% since April due to draws to meet deficits. Cancelled warrants - metal earmarked for delivery - at 35% suggest another 26,450 tonnes is due to leave the system.
The chances of top producer China making up the shortfall in Europe are low.
"The zinc market in China has tightened considerably in recent months due to underwhelming refined production during the first half of 2022 and sluggish zinc imports from the rest of the world," analysts at Citi said in a note.
"This reality suggests China lacks meaningful zinc export capacity to relieve ex-China shortages. Port congestion and high freight costs will continue to frustrate and delay zinc shipments."
(Reporting by Pratima Desai; editing by Barbara Lewis)