A rout in commodity markets has pushed prices of aluminum, zinc and nickel down to levels where many high-cost producers are starting to suffer, although the pain threshold may have to increase before widespread closures help balance markets.

High cash premiums in aluminum and zinc along with recent weakening in commodity currencies are providing a cushion to some producers, who otherwise might be forced to halt loss-making output in markets burdened with surpluses.

It becomes a question of how long you can hold your breath under water, if you can hold breath just a moment longer, then it may be your rival who makes the cuts, said Nick Moore, head of commodity research at RBS in London.

If they don't cut, then prices will be the grim reaper. They will go down to a level which will force closures.

Producers are likely to face added pressure in the third quarter, the seasonally slowest period for metals demand, he added.

Norsk Hydro (NHY.OL) said on Wednesday it will shut its 180,000-tonnes-per-year Kurri Kurri aluminum smelter in Australia due to low metals prices and a dismal economic outlook.

In China, the world's top aluminum producer, about 700,000 tonnes of capacity has been idled in recent months in the top-producing province, a senior official said.

Those Chinese cutbacks, however, have been largely offset by new lower-cost smelters coming onstream in Western China and overall output is still expected to rise in double digits this year without further cutbacks, said Janet Kong, managing director of research at China International Capital Corp.

Many high-cost smelters run by state-owned firms are reluctant to close down due to concerns about unemployment.

Our talking with domestic smelters indicates 15,000 yuan/tonne may be needed for deeper cutbacks, Kong said by email. The domestic Chinese aluminum price is hovering around 16,000 yuan per tonne.

On the international market, a similar dynamic is in force, where cash aluminum prices on the London Metal Exchange have shed 15 percent since early March down to around $1,975 per tonne, below the marginal cost of about $2,150.

But cash premiums have jumped to the highest levels in almost two years at $220-$240 per tonne for duty-unpaid material in Rotterdam as stockpiled material in warehouses under financing deals has restricted availability.

We're not below marginal costs if you take cash plus the spot premium, hence, the pressure on smelters to close is not as great as you would perceive, said analyst Wiktor Bielski at VTB Capital in London.

The price would have to go to $1,850 for the actual industry to be below the cash costs... you'd need to remove 2 or 3 million tonnes of capacity for it to have any meaningful impact on the market.

The aluminum market is expected to have a surplus this year of 445,000 tonnes, according to 18 analysts polled by Reuters in April.


The zinc market is also burdened by excess supplies and is expected to have a global surplus of 249,000 tonnes this year, the sixth consecutive year of surplus.

Inventories at LME-registered warehouses have ballooned to 943,325 tonnes, the highest since 1995.

The over supplied market has weighed on prices, which have slid 14 percent since late January to $1,869 per tonne, based on the LME cash price, lower than the marginal cost of $1,900.

Premiums for physical metal, like in aluminum, however, are high and are helping dampen the impact of low prices.

In addition, some producers are seeking to hang on, anticipating a tighter market in coming years due to the planned closure of several big mines which are running out of ore.

This medium term story is propping the price up more than it should do, said Stephen Briggs, strategist at BNP Paribas.

So I think you could see a greater fall in percentage terms than for aluminum or for nickel before you see serious cuts. You could be looking at $1,700 which is quite a bit below where we are now.

Analyst Duncan Hobbs at Macquarie said the highest cost producers are small-scale, low grade mines in China and that below $1,800 per tonne mines will start struggling.


Nickel, another metal in surplus, has better near-term prospects of cutbacks in China, where low-grade nickel pig iron (NPI) producers are struggling at current prices.

The cash LME nickel price has tumbled 24 percent to $16,687 per tonne since early February, below the marginal cost of about $17,000.

It looks like there could be 70-80,000 tonnes of (nickel pig iron) capacity that is vulnerable, said Bielski.

Cutbacks would help balance a market that is expected to be in surplus by 50,000 tonnes this year, according to the International Nickel Study Group.

I don't think there's much further downside below $17,000 because of the cost pressures and price pressures on the NPI industry, Briggs said.