Glencore’s Zinc Rationale Defies History – by Liam Denning (Bloomberg News – October 15, 2015)

“You shut up!/No, YOU shut up!” is how schoolyard scuffles kick off. Miners tweak it slightly to: “You shut down!/No, YOU shut down!”

Ivan Glasenberg, the chief executive of Glencore, has long bemoaned miners’ tendency to literally dig themselves into a hole with too much supply. As concern about Glencore’s swollen debt has hit the stock price, Glasenberg has recently taken himself at his word, ordering a temporary shutdown of some of the company’s zinc output. That caused the price of the metal to jump 10 percent last Friday.

But history suggests Glencore’s fight to raise zinc prices sustainably could be a tough one. Taking yourself out of the market in order to reduce excess supply can be a great strategy— but primarily for those rivals who keep producing and benefit from higher prices while your own reserves stay in the ground.

Sure enough, this week the marketing chief at one of said rivals, BHP Billiton, confessed himself “quite intrigued” about all the talk of cutting production, as he hadn’t seen any capacity being shut-in that was making cash. In other words, BHP is perfectly happy to let what it sees as higher-cost rivals — whomever could he have meant? — do the “rational” thing and withdraw.

The CEO of Vedanta Resources concurred, saying that while it was “rational” for Glencore to close capacity in the face of lower zinc prices, it was equally “rational” for Vedanta to keep churning the metal out at capacity. Clearly, “rational” is quickly establishing itself as the passive-aggressive term of choice in mining circles these days.

Cutting supply that isn’t earning a decent return is right to do, and zinc prices may rise further next year as a result. But a zinc floor can be shaky.

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