Wood Mackenzie: Watch Zinc Smelters, Not the Miners

Base Metals Investing

After a tumultuous 2018, Wood Mackenzie Senior Research Analyst Rory Townsend thinks zinc smelters will help the battered commodity this year.

After facing a tumultuous 2018, Wood Mackenzie Senior Research Analyst Rory Townsend feels that zinc smelters — not the miners — will push the battered commodity forward this year.

In a presentation given at the Prospectors and Developers Association of Canada convention in Toronto, Canada, Townsend started by explaining some of zinc’s 2018 ups and downs.

“After reaching the highs of about US$3,600 in mid-February, [it] then fell to subsequent lows below US$2,300 in September. While we do feel that the peak in the price was premature, we don’t feel that the dramatic fall in the price was supported by fundamentals as metal stocks continued to fall through the year,” he said.

“So what was driving the zinc price? All the negative sentiment being driven by the escalation of trade disputes between the US and many of its major trading partners. As the year progressed, it became clear that the global economy was cooling, and with it, sentiment and metal prices deteriorated further.”

With 2019 already in progress, Townsend laid out Wood Mackenzie’s predictions surrounding zinc mine production and what it means for the concentrate market.

We’re expecting a surge in mine production capability over the next few years. With increased production from Glencore’s (LSE:GLEN) Lady Loretta and McArthur River, to a host of projects and restarts ramping up such as MMG’s (HKEX:1208) Dugald River, Vedanta Zinc International’s Gamsberg … and Heron Resource’s (ASX:HRR) Woodlawn, to name a few.” he said.

“So what does this new mine supply mean for the concentrate market? We’re expecting sequential years of global concentrate surplus for the next few years. This concentrate surplus is expected to be very large, peaking at over 800,000 tonnes per annum in 2020 and 2021.”

Having titled his presentation “Zinc: Concentrate on the smelters, not the miners”, the senior research analyst emphasized that while production rates look promising, market watchers should keep their eyes on the smelters.

“With regards to the global benchmark contract, the concentrate surplus, which we’ve forecast for this year should put an advantage in the hands of the smelters when it comes to the annum contract negotiations, and we’re expecting them to be certainly higher than what they were last year. We may well see escalators return to the contract,” he said.

“Increased availability of concentrate combined with increased treatment charge revenue should enable global utilization rates to increase from 82 percent last year to 86 percent this year. Rest of the world smelters are already operating at around 92 percent utilization, so pretty high, but we’re expecting this to increase to historical highs around 2020.”

As of March 5, zinc was trading at US$2,786 per tonne on the London Metal Exchange.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.

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