Trader Glencore has agreed to buy zinc concentrates from Peruvian miner Volcan without charging for processing, taking the view that it will be able to more than recoup the charges by profiting from rises in zinc prices, industry sources said.
Normally miners are expected to pay for their concentrates to be processed, paying more if there is a surplus of concentrates relative to smelter capacity and less if smelters have to compete for the business.
The sources said Glencore, which analysts say is responsible for arranging the smelting under the deal, had bought zinc concentrates from the world's fourth-largest zinc producer for zero treatment charges.
It hopes instead to profit from higher prices and a price participation arrangement commonly reached between miners and smelters.
The two sides typically share the profits from changes in the price of zinc through price participation clauses, known as escalators and de-escalators, to cover fluctuations.
Glencore's deal with Volcan is said to include a hefty 25 cents for every dollar increase in the price of zinc. This is well above recent deals done at 5 cents.
Presumably the buyer is not going to be able to find a smelter to process that material for free, so part of the profit would lie in an increase in zinc prices because the business is reported to include quite a substantial price escalator, said Duncan Hobbs, analyst at Macquarie.
What it would suggest is that the buyer is positive on the zinc price.
Commodities giant Glencore
The reported deal follows the annual International Zinc Association conference in Palm Springs, where annual treatment charges tend to be set.
Sources last week said a key deal was reached at the meeting when Teck Resources Ltd
The treatment charge is based on a $2,000 per tonne London Metal Exchange (LME) zinc price, sources said.
A European concentrates dealer, referring to the reported arrangement between Glencore and Volcan, said:
At a base price of $2,000, the charge will rise 25 percent.. From $2,300 onwards, you're at 30 percent. Between now and next year, is a price of $3,000 for zinc possible, yes, it's very possible. That would be a $300 TC (treatment charge),
This deal confirms a strong view of the zinc price going forward. This is quite useful for them (Glencore) in their sales campaign to the Chinese, to say be happy with your $70 to $80 TC, because we are buying it at zero.
Zinc prices are up more than 15 percent so far this year, hitting a 4-1/2 month high at $2,220 a tonne in late January, after dropping by 25 percent in 2011.
Hobbs said prices of zinc, used to galvanise steel, could rise over the next 1-3 years as major mines shut down or decline in output and replacement capacity struggles to keep up.
There is a rising possibility that mines close and some decline before sufficient new supply comes into the market.
It traded at $2,129 a tonne on Wednesday.
(Additional reporting by Chris Kelly in New York and Karen Norton in London; Editing by Anthony Barker)