Why zinc is on a roll

2015 could see supply constraints as new mine supplies are not likely to improve



The world metals market has been facing headwinds in the last two years, with industrial production slowing. Tightening liquidity in the face of the monetary policy normalisation by the US Fed has added another dimension to the challenges.

Despite this, zinc has performed well. Global zinc market fundamentals have been tightening for some time now. They are set to get tighter as supplies are constrained despite the modest growth likely in consumption demand. Prices have risen by a little over 10 per cent this year, making the metal a star performer.

Speculation impact

Speculative interest too played a role in price performance. From $1,900 a tonne in 2013, zinc prices steadily rose to touch $2,400/tonne four months ago, but gave away a part of the gains, moving down to $2,300/tonne by September this year. LME cash price on December 3 was $2,210/tonne.

2015 could see zinc supply remain constrained. Exchange stocks are drawn down. New mine supplies are not expected to improve anytime soon as prolonged low prices have discouraged new investments and existing mines are ageing. At least two mines are set for closure.

Environmental rules are also becoming stricter by the day, and China’s producers are seriously affected. If this persists, over the next two years, zinc inventories are likely to deplete to low levels.

Demand outlook

On the demand side, historically, falling crude prices trigger a rise in metal demand. But this may take time. The US has, of course, shown strong signs of recovery and economic growth. Demand has been robust in 2013 and this year. However, going forward, demand from the housing sector and automotive sector may slow down. Demand growth in the developed countries of Europe and Japan is expected to be tepid, given macro-economic challenges.

Worldwide, growth prospects for base metals are still dominated by China. Zinc is no exception. For 2014, experts project a 6 percent Chinese demand growth to approximately 6.2 million tonnes. Chinese demand is usually driven by fixed asset investment and the automotive sector.

These two sectors are expected to see a slowdown in growth to less than 5 per cent over the next two years. The same holds true for India.

Going by the estimates of the International Lead and Zinc Study Group, the world zinc market would end the year in a deficit of 4,00,000 tonnes.

Over 2015 and 2016, this deficit can widen further by well over 25 per cent. This suggests that, going forward, zinc prices will have to push higher. Only this will create incentive for mining companies to make fresh investments.

Price pressures

On balance, one can expect zinc prices to rise by over 10 per cent from the current levels and reach $2,500/t in 2015 and possibly $ 2,700/t and above by 2016.

What are the risks to this price forecast? If the world were to face a protracted slowdown in housing and automotive markets, there would be slump in zinc demand. Then zinc prices may slip back towards $2,000/t, dragging down treatment charges as well.

But it is also likely that a tightening of the market occurs faster than we expect. In such a case, prices could spike rapidly. A tightening commodity market always attracts speculative capital, which will have an exaggerated impact on prices.

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