Spotlight. Outlook turns bullish for zinc

Among the base metals, zinc has outperformed its peers and been among top gainers of 2016, with prices moving up by about 45 per cent since the beginning of last year.

Supply-side dynamics representing intense concentrate supply squeeze and production cuts defined the market. No wonder, speculative capital flowed into the metal as evidenced by LME price rallies.

Interestingly, the bullish outlook remains intact for 2017 too, with demand-supply balances set to tighten, notwithstanding the ongoing restarts and production expansion.

While refined production is likely to be restrained by the growing concentrate shortage, demand side looks healthy with sizeable galvanised steel capacity additions around the world.

Indeed, some industry representatives are forecasting a 500,000-tonne deficit this year in the wake of restrained supply and growing demand. However, the overhang of inventory the market has nursed in recent years needs to be worked off before the market can commence its next leg of bull run.

On the demand side, China saw an increase of close to 5 per cent, following the stimulus package that boosted construction and infrastructure activity. Additionally, the buoyant auto sector generated strong zinc and galvanised steel usage. But outside of China, zinc demand has been disappointing with a contraction of about 3 per cent. Admittedly, Chinese galvanised steel production has had a strong year but the excess is being exported at the expense of production in other regions, particularly in Asia.

If zinc consumption growth was muted in 2016, especially outside China where there was some de-stocking activity, and in China, with government trying to close excess steel-making capacity and export markets putting up trade protection barriers, the outlook for 2017 appears bright. This is because of huge addition of hot-dip galvanising production coming on stream around the world. There is, therefore, strong expectation that zinc demand will rebound as the new galvanising lines build process stocks of zinc and ramp up production. Although China has been the key driver of zinc demand over the past decade, 2017 may see domestic consumption stabilise at lower rates as the government works to cull excess capacity, but stimulus packages may deliver some resilience.

As for supply outlook, it is clear that the global zinc concentrate market has been plunged into a deep deficit; but miners are responding already. Plans are afoot to maximise output, ensure early development of projects, restart previously idled mines and so on.

Taking cognisance of this, more concentrate is likely to hit the market from unreported stocks in countries like China and North Korea.

Despite this, there could be significant deficits in concentrate and refined markets in the next 2-3 years and disruptions cannot be ruled out either.

However, market headwinds cannot be overlooked. For one, there is mounting pressure on China to tackle the glut in the steel market. The benefits of stimulus package for construction industry may start to fade and Chinese steel may continue to face trade barriers around the world. Although zinc has largely been a supply-side story in 2016, over the coming quarters, the strength of demand will determine how fast inventories deplete. There is belief that the visible refined stocks will start to be depleted more meaningfully in time and this should give prices a fresh lease of life to the upside.

LME cash price moved up marginally from the annual average of around $1,950 a tonne to about $2,060 a tonne in 2016. On current reckoning, the current year is set to see a big jump of over 40 per cent to test the $3,000 a tonne levels and possibly a similar jump in 2018.

The writer is a commodities market specialist

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