Zinc Supply Tightens as Demand Rises Higher

Demand for refined zinc outpaced supply during the first five months of the year, the International Lead and Zinc Study Group says.

ilzsg

Demand for refined zinc outpaced supply during the first five months of the year, reaching a deeper deficit compared to the same period in 2016, the International Lead and Zinc Study Group (ILZSG) says in its latest report.

The market recorded a deficit of 178,000 tonnes from January to May compared to 133,000 tonnes during the same time last year.

According to ILZSG data, refined zinc output increased 0.4 percent, while demand was 1.1 percent higher. Despite recent closures, mine production also rose by 320,000 tonnes to 5.37 million tonnes — up 6.3 percent compared to last year.

In 2016, zinc prices surged more than 60 percent due to deficit fears — major mines around the world shut down, including MMG’s (HKEX:1208) Century mine and Vedanta’s (LSE:VED) Lisheen mine. But mine output from Eritrea, India, Peru and Turkey has offset those supply reductions and pressured prices this year, the ILZSG says.

Geopolitical concerns have also put pressure on zinc prices in 2017, with investors turning away from riskier investments in favor of safe-haven assets like precious metals. As a result, prices have increased only 8 percent since January, a disappointment for many bullish investors.

Despite those factors, zinc has been on the rebound since June on the back of supply concerns and falling warehouse inventories. On Wednesday (July 19), LME zinc prices were trading at $2,747 a tonne after touching a three-month high of $2,883 last week.

FocusEconomics panelists expect prices to remain largely stable at the current level in the near future, as the zinc supply deficit persists and stocks continue to fall. Looking ahead to the next few months, they estimate that zinc prices will average $2,702 in Q3. 

The most bullish forecast for the quarter comes from BMO Capital Markets, which is calling for a price of $3,307; meanwhile, Euromonitor International is the most bearish with a forecast of $2,415.

Similarly, JPMorgan Chase (NYSE:JPM) advised clients last week to take a short position in zinc, targeting a decline to $2,400.

“We think the second-half 2017 fundamental outlook for zinc looks less supportive, easing supply constraints and questionable demand strength,” Reuters quotes JPMorgan analyst Natasha Kaneva as saying.

Hedging by producers could also negatively impact prices and “more forward selling is likely”, Robin Bhar, head of metals research at Societe Generale (EPA:GLE), told the news outlet.

“There’s always the danger that the market will be capped by producer selling and that hidden inventories will seep out, that’s a perennial problem,” added Bhar, who forecasts that third-quarter LME zinc prices will average $2,520.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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