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Glencore ‘vindicated’ on zinc supply cuts, Morgan Stanley says

Zinc has led gains in base metals this year with a 42% advance.

Glencore’s decision to cut zinc output to fight a rout in prices last year has been vindicated as the metal has rallied in 2016, according to Morgan Stanley, which held out the possibility that the commodity trader may order restarts.

“It turns out, cutting/waiting was a good plan,” Morgan Stanley said in a note, which contained the heading “Glencore, vindicated.” The metal “may be supported/lifted, if China’s steel-production rate remains at around 800 million tons per year into 2017. Conversely, the most likely short-term price cap for zinc is the reactivation of Glencore’s dormant mining capability,” it said.

Zinc has led gains in metals this year after the shutdown of depleted mines coupled with Glencore’s cutbacks. Glencore chief executive officer Ivan Glasenberg has repeatedly argued the case for miners not producing materials into oversupplied markets, saying in May that volume growth can’t be an end in itself. Morgan Stanley said zinc is its top commodity pick, while Goldman Sachs Group has dubbed it the “bullish exception” among metals.

“We’re zinc bulls,” Morgan Stanley said. “But its 2016 price performance has surprised even us. Any upside from here depends on China’s steel production rate and Glencore’s willingness to re-fire some of its mine supply.”

Zinc for delivery in three months traded 0.3% lower at $2 279 on the London Metal Exchange and has risen 42% this year. That performance has made it the top performer on the Bloomberg Commodity Index in 2016.

Shares of Glencore, which reports first-half financial results on August 24, declined 3.3% to 182.4 pence at 11:31am in London. Zinc production in the second-quarter fell 33% from a year ago, the company said earlier this month. Its previously committed to cutting production by a quarter as it adopts a “disciplined approach” during periods of low prices.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

© 2016 Bloomberg

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