Supply Concerns Pushing Zinc Prices Higher

Zinc prices have been on the rebound since the beginning of June, supported by mine supply worries and declining global inventories.
After touching a low of $2,442 per tonne on June 6, prices have bounced back sharply. Last week, zinc hit a fresh two-month high of $2,704, and prices jumped further on Tuesday (June 27) to reach $2,717.
However, some market watchers wonder if zinc’s positive performance will continue. “You’ve got some news with a bullish tone, so that’s supporting the market, but I don’t know how sustainable all this will be,” said Gianclaudio Torlizzi, a partner at consultancy T-Commodity in Milan.

Zinc supply an issue

As mentioned, supply concerns have been driven partially by falling zinc inventories. Last week, orders to withdraw zinc from LME stockpiles jumped 10 percent, to the highest level in three years, SP Angel analysts said in a note.

In fact, stockpiles are at their lowest level since 2009, at 301,175 tonnes; that’s a fall of more than 29 percent year-to-date.
Keeping an eye on stockpile levels is important for zinc-focused investors, as they show how much zinc is readily available to end users. “Inventory [levels] can swing market balance and, to some extent, prices too,” CPM Group commodity analyst Yvonne Li explained via email.
Meanwhile, zinc mine supply has been jeopardized by a strike in Peru. Ricardo Juarez, secretary general of the country’s National Federation of Miners, Metallurgists and Steelworkers, said miners plan to protest “anti-labor” government proposals starting on July 19 for an indefinite time.
The federation includes 110 unions representing 40,000 workers at various mines in Peru, the second-largest zinc producing country. In total the nation put out 1.3 million MT of zinc in 2016.
Peru’s nation-wide mining protest could halt production of about 10,000 tonnes of zinc in concentrate from the Antamina mine, Citi analyst Nell Agate said in a note.

Weak zinc demand to come?

But while threats to zinc supply exist, slower demand from China, the world’s top consumer of the metal, has been pressuring zinc prices. Since January, many analysts have been expecting weaker demand from the Asian country in the near term.
“Potential weakness of zinc prices in the upcoming months may stem from tepid demand for galvanised steel,” Agate also said.
Geopolitical tensions during the first half of the year have also pressured zinc, as investors have turned to safe-haven assets, like precious metals, and have moved away from riskier assets, such as base and industrial metals.

Zinc price outlook

Despite those worries about China, analysts remain cautiously optimistic about zinc prices. Panelists at FocusEconomics see zinc prices rising modestly this year, averaging $2,758 in Q3.
The most bearish forecast for the third quarter comes from Capital Economics, which is calling for a price of $2,490; meanwhile, Deutsche Bank (NYSE:DB) is the most bullish with a forecast of $3,400.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.