Recent fears of a looming shortage in zinc supply have seen the commodity overcome its difficult start to 2016, to emerge as one of the best performing base metals of the first quarter.
After falling almost 30% in 2015, the zinc price succumbed to further selling pressure in mid-January when it hit a six and half year low of $1 444.50/tonne (t) as weak demand and high inventory levels weighed on the market. Since then, the metal price has rallied with the three-month benchmark London Metal Exchange price north of $1 750/t.
This optimism comes as the closure of key mines as well the curtailment in production at others, is expected to lessen stock levels and lead to a rebalance between supply and demand.
After shutting down in 2015, both Vedanta Resources’ Lisheen Mine in Ireland and MMG’s Century Mine in Australia have recently made their final shipments of the metal. In late 2015, Nyrstar, the world’s largest zinc producer, said it would consider reducing its zinc concentrate output by a further 400 000t as its suspended operations in the United States, Canada and Mexico took around 150 000t of concentrate off the market. Commodities giant Glencore also cut a third of its zinc annual output, taking 500 000t off the market.
Although most of the production cuts were announced late last year, their impact appears to have already had an effect. Initial data from the International Lead and Zinc Study Group (ILZSG) shows that the global market for refined zinc recorded a surplus of 183 000t in the first half of 2015 before swinging to a deficit of 60 000t in the second half. Total inventories, including those held in LME, Shanghai Futures Exchange and Chinese State Reserve Bureau warehouses fell by 55 000t to 1501kt over the course of that year.
According to Macquarie Research zinc mine output will fall by about 3.3% in 2016, while JPM mine depletion and cost-related closures is to lessen output by as much as 4.5%. Global demand is expected to increase by 1%. A slight improvement from ILZSG data saw overall demand increase by 0.7% in 2015.
“Key uncertainties are demand growth in China, additions to supply from both greenfield and brownfield expansions, and a possible reactivation of idled capacity,” the World Bank said in its 2016 Commodities Outlook.
Hopes that the Chinese government may implement stimulus measures are also expected to drive demand for the metal, used to make galvanised steel and household appliances. “Investors seem nervous to be short, as stimulative measures by Chinese policymakers could get demand going, when supply is clearly an issue,” Securities’ Bart Melek said of a recent increase in the zinc price.
Still, Macquarie expects the decrease in concentrates to curtail smelter products, spurring a deficit of 400 000t – 500 000t in the metal and “heavy stock drawdowns”. “The metal deficit in 2016 should lead to to stocks of just over five weeks of consumption by year-end – a level that has historically been an inflection point for zinc upside,” Macquarie analysts said in their latest Commodities Compendium.
Macquarie expects an average annual zinc price in the region of $1 830/t. Taking the apparent stabilisation of China’s property sector into account, its loosening credit conditions and rising incomes, which are expected to filter through to the production and sales of household appliances, Capital Economics expects the zinc price to reach $2 000/t by year-end.
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