Rising supply clouds zinc’s prospects

Despite signs of demand up-tick, average monthly prices could be range-bound

Of the base metals that have been correcting off late, Zinc has been the worst performer with 22 per cent loss on LME (London Metal Exchange) year-to-date. While it touched the decade high of $3,606 per tonne in February, the trade tensions that exerted pressure on all the base metals has dragged the white metal’s prices to almost $2,596 per tonne as of date.

Zinc had outperformed other base metals in 2016 with returns of about 60 per cent and had been a low key in 2017 with about 29 per cent returns. Going ahead, despite signs of up-tick in demand, with expected increase in output from new mines, narrowing supply constraints of the refined metal and uncertainties in the user industry (steel), the average monthly prices could be range-bound between the present levels and $3,600 per tonne in the next six months.

Modest demand

The metal’s usage has grown at a compounded annual growth rate (CAGR) of 1.01 per cent from 2013 to 2017.

As per the International Lead and Zinc Study Group (ILZSG), global demand for refined zinc metal is forecast to rise 2 per cent to 13.97 million tonnes in 2018, after remaining stable over the past three years.

But the actual metal usage, in the first four months of 2018, has not been so encouraging. The reported zinc usage in January- April 2018 was 4.4 million tonnes, which is flat compared with the usage in the same period a year ago.

A modest 0.4 per cent increase in global usage of refined zinc metal was mainly influenced by rise in apparent demand in China and India. In Europe, Japan and the US, usage was lower than that in the first quarter (January-March) of 2017.

But the silver lining is that the Chinese imports of zinc concentrates rose 21.9 per cent to 3.62 lakh tonnes compared with the first quarter of 2017. Net imports of refined zinc metal rose by 0.82 lakh tonnes to total 1.36 lakh tonnes. China being one of the major consumers of zinc, rise in imports by the country indicates increasing demand for the metal.

Steel galvanizstion being the most important demand driver for zinc, the trend in demand for steel acts as a harbinger for the usage of this white metal.

Consumption of steel, though robust, is hazy in the near future with environment protection measures being implemented in China and uncertainties owing to trade tensions. This might pinch the demand for non-ferrous zinc metal going forward, exerting pressure on prices.

Increasing supply

Tightening in the zinc market started in 2015; contraction in mine supply affected the production and availability of the refined metal. Zinc supply has been falling over the past few years with major mines such as Australia’s Century and Ireland’s Lisheen reaching the end of their lives and Glencore cutting its output. But experts believe the strong zinc prices will prompt miners to bring idled capacity to work.

After increasing by 1.1 per cent in 2017, ILZSG forecasts global zinc mine production to rise 5.1 per cent to 13.62 million tonnes in 2018. Additional output is forecast to be generated mainly from Dugald River mine and New Century Resources in Queensland, Australia and Vedanta’s Gamsberg mine in South Africa.

In case of metal output (metal that is produced out of ore in smelters), ILZSG anticipates an increase of 3.6 per cent in world refined zinc metal output to 13.71 million tonnes in 2018, after a reduction of 2.3 per cent in 2017. This will be mainly driven by further rise in Chinese output and recovery in Canadian production, where output in 2017 was negatively impacted by a strike at Noranda Income Fund’s Valleyfield refinery.

Thus, higher supplies are likely to bring down the deficit in the zinc market.

ILZSG forecasts global refined zinc market to witness a shortfall of 2.23 lakh tonnes in 2018, down from nearly 4.6 lakh tonnes in 2017.

Inventories at lower levels

After languishing in near-decade lows of 1,50,000 tonnes at LME and 1,00,000 tonnes at Shanghai in February, zinc inventories have recovered from record lows.

The lower inventory levels can act as a support for pushing up the prices from the current levels.

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