MELBOURNE, March 30 (Reuters) - Korea Zinc Inc 010130.KS , the world's third-largest zinc smelter, has agreed to take a 15 percent drop in annual processing fees for 2017 as smelters grapple with a dearth of mine supply, Metal Bulletin reported.
The South Korean firm agreed annual treatment charges with Canada's Teck Resources TECKB.TO of $172 per tonne, Metal Bulletin reported, citing unidentified people with knowledge of the matter.
The first major deal of the year, it is likely to set the global benchmark and compares to $188 a tonne in 2016 agreed between Teck and Glencore GLEN.L , the deal that set last year's benchmark. Zinc declined to comment. Teck Resources did not immediately respond to a request for comment.
Mining companies pay treatment charges (TCs) to smelters, to have their concentrates turned into refined metal. The charges fall when supplies dwindle as smelters compete to find supply.
Zinc mine supply has been shrinking as several blockbuster mines, such as Australia's Century and Ireland's Lisheen, have been tapped out with no new major lodes in the pipeline.
Korea Zinc said last month it planned to cut its refined zinc production by 7.7 percent to just under 600,0000 tonnes this year due to tightening supply and low treatment charges. Metal Exchange zinc CMZN3 has risen 11 percent so far this year to $2,861 a tonne, having soared 60 pct last year, after prices touched seven year lows last January.
Zinc treatment charges have a pricing component which are linked to LME prices. Smelters win a percentage increase in treatment charges for every dollar the LME price increases above a set basis price, but if the price falls, TCs also drop, alleviating fees miners must pay in a low price environment.
In 2017 terms, Korea Zinc will pay for 85 percent of the contained zinc in concentrate, according to Metal Bulletin, meaning it still has exposure to rising prices considering recovery rates are generally 94-95 percent.