Zinc was the best-performing LME metal in 2016, reaching multi-year highs. The base metal touched a nine-year peak of $2,985 on November, leading the metals rally last month.
A growing demand from China and speculations about the incoming US president Trump’s infrastructure plans supported the steepest climb for the metal since 2009. The speed of the rally was “too fast and too furious” for some analysts that consider that “there is still correction potential”. However, the metal used to galvanise steel has gained nearly 90 percent since an over six years low of $1,444.50 in January.
In 2015, zinc prices struggled, dropping significantly in the last quarter. But predictions of an imbalanced market, with a strong demand and a tight supply, for this year were right.
The International Lead and Zinc Study group estimates in their last report that the market will remain in deficit with a shortage of 248,000 tonnes for 2016.
2017 Zinc Forecast
The base metal seems to have another great year ahead. China, that contributes to approximately 50 percent of global zinc demand, has applied restrictions for mine production and will continue to rise its demand supported by government’s policies.
An expected global economic growth throughout next year has also strengthened investor sentiment. To add to the list, zinc is estimated to have the tightest supply of all metals, making it an attractive commodity for investors.
Steady demand from China. Steel demand from China has strengthened due to the government’s push for more infrastructure projects and strong property sales in the top consumer country.
CLSA analyst Daniel Meng told Reuters: “In the first half of 2017, we will continue to have very strong steel prices because property sales remain very strong at least till October and PPP (public-private partnership) program is still in early stage and supply side should remain controlled.”
But, Oxford Economics commodities analyst Dan Smith was more cautious and said: “We’re in the midst of Chinese credit boom at the moment, social financing has been growing strongly in the last few months …(but) I think we’re starting to run into overbought territory.”
Optimism over global growth. There has been a rotation of funds towards risky assets supported by expectations of economic growth next year.
UBS analyst Daniel Morgan told Reuters: “The world is looking more like it’s on a growth footing,” due to a Republican-controlled U.S. Congress and a leadership reshuffle in China that may lead to policies supportive of growth.
“For those reasons you’ve probably had a big shift in sentiment toward a growth stance rather than a yield stance,” he said.
Citigroup expects most raw materials to perform strongly next year as global economic growth picks up. Zinc is amongst its top picks, which it is expected to rise from an average price of $2,085 a ton over 2016 to an average $2,590 a ton over 2017.
This forecast comes a couple of weeks after Goldman Sachs upgraded its rating on basic materials to overweight for the first time in four years. The bank also said in a note on November that it expects zinc to outperform aluminium and copper over the next six to nine months.
An imbalanced market. Falling mine production could allow the metal rally to continue for many months. The International Lead and Zinc Study group expects a decrease in zinc by 5.6 percent to 12.47 million tonnes in 2016 and 5.9 percent to 13.20 million tonnes next year.
The closure of two main mines in 2015, Century and Lisheen, that together produced approximately 0.6 million tonnes of mined metal, had a big impact on supply. Production cuts from other mines, including Glencore (LON:GLEN) and Nyrstar (BRE:NYR) also allowed prices to soar. To add to the curbed supply, China has recently ordered the closure of 26 smaller mines due to environmental concerns.
Bloomberg Intelligence analysts said that zinc production will continue to trail consumption through the years to come.
Glencore (LON:GLEN) CEO Ivan Glasenberg said recently: “tightness is starting to flow through the entire supply chain and is beginning to reach the metal market.”
He also said that capacity at Glencore’s mines would stay shut until market conditions meant the extra supply would not push the market lower.
The IZLSG forecasts a global demand increase for refined zinc to rise by a marginal 0.6 percent to 13.57 million tonnes this year followed by a 2.1 percent increase to 13.85 million tonnes in 2017.
George Gero, a managing director at RBC Wealth Management in New York, told Bloomberg: “You don’t see speculators in zinc, it’s reacting more to physical demand,” adding that “the increase in canceled warrants is a sign of physical demand.”
Companies to watch out for
Scotiabank noted that “[z]inc continues to be our preferred exposure as we believe that the metal has the best near-to medium-term fundamentals within the base metals complex.”
The bank’s recommended companies for the base metal include: Trevali Mining (TSX: TV), that had over 168 percent gains year-to-date, Pan American Silver (TSX: PAA), over 157 percent gains year- to-date, Lundin Mining (TSX: LUN), that reached 85 percent gains year-to-date, and Hudbay Minerals (TSX: HBM), that had gains of over 75 percent year-to-date.
There is growing optimism and strong sentiment surrounding the zinc market. Looking forward to next year, it might be a good plan to keep an eye on the base metal, as it is among top picks from analysts and banks alike. A tight supply, production cuts and a growing demand may continue to boost prices as the new year begins.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Trevali Mining is a client of the Investing News Network. This article is not paid-for content.