The zinc price has not fared well in 2015, but experts remain confident in the metal’s fundamentals.
For our latest zinc price forecast, check out LME Zinc Stocks Falling: Zinc Bull Run on the Horizon?
While hopes for zinc remain high, the metal has not fared well in 2015.
As the chart below from Kitco shows, the base metal reached its high for the year back in May, when it hit nearly $1.10 per pound; however, since then it has fallen fairly precipitously, and is now near the $0.70 level.
That news may come as a surprise to market watchers who remember what analysts were predicting for the zinc space this time last year. At the time, the consensus was that “crunch time” was coming in 2015. Put simply, many believed that LME zinc stocks would decline this year on the back of major zinc mine closures, with the zinc price rising as a result.
Image courtesy of Kitco. Zinc spot price, December 2014 to December 2015.
With the year nearly at a close, the question now is “what happened?” To answer that question and to learn more about the zinc forecast for 2016, the Investing News Network got in touch with a range of zinc market participants. Read on for their thoughts.
2015 theme: Closures and cuts
As mentioned, heading into 2015 mine closures were weighing heavily on the minds of zinc market participants. In particular, Stefan Ioannou of Haywood Securities pointed to the closure of MMG’s (HKEX:1208) Australia-based Century mine as one to watch.
And indeed, the Century mine did stop production this year. The company put out a release in October stating that the mine, which had been in operation for 16 years and was Australia’s largest open-pit mine, had ceased production in August. According to MMG, Century is expected to produce 320,000 to 370,000 tonnes of zinc in zinc concentrate this year.
In 2015, MMG also clarified plans for its Dugald River project, an important development given that there had been some speculation about whether it would be able to fill the void left by Century. The most recent update from MMG suggests that it will not be able to do so — this past summer, MMG said that Dugald River’s yearly output will come to 160,000 tonnes of zinc in zinc concentrate, much lower than even the tail end of production expected from Century this year.
Additionally, the Lisheen mine in Ireland, owned by Vedanta Resources (LSE:VED) shut down in November. According to a recent Wood Mackenzie report, together Lisheen and Century will remove about 675,000 tonnes of annual zinc production from the market.
Along with those outright shutdowns, key players in the zinc market have been cutting production this year. Most notably, Glencore (LSE:GLEN) said in October that it will be reducing its annual production of contained zinc metal by 500,000 tonnes across its operations in Australia, South America and Kazakhstan. That’s a third of the company’s output and about 4 percent of global zinc supply.
That move stoked the zinc price — and zinc companies’ share prices — as did news early in November that Nyrstar (EBR:NYR) was looking at suspensions that could take 400,000 tonnes of zinc concentrate off the market. Nyrstar has since announced plans to place its Middle Tennessee mines on care and maintenance, a decision that will take 50,000 tonnes of zinc in concentrate per year off the market.
Nyrstar CEO Bill Scotting also said that the company “expect[s] to complete the process to divest the majority or all of [its] mines over the course of 2016,” so further reductions in zinc output remain possible.
2015 theme: Price in the dumps
Unfortunately, as the above chart from Kitco shows, even these sizeable reductions in zinc supply did not buoy the zinc price for long. While that might seem odd, in recent months those involved in the space have put forward numerous reasons why that’s the case.
For instance, at the beginning of October, many were citing high inventories and concerns about Chinese demand as responsible for the zinc price downturn. A Financial Times article published at the time said that in particular a build up at LME warehouses in New Orleans was weighing on sentiment.
And indeed, as the below Kitco chart shows, LME zinc stocks did rise steeply from September into October, though they are now on a slow decline. Though there’s been no confirmation, many believe Glencore was responsible for the spike — the company said in September that it would be liquidating a portion of its commodities inventory in an effort to raise cash, and while it did not say which commodities it would be selling, many market watchers believed zinc was one.
Image courtesy of Kitco. LME zinc warehouse stock levels, December 2014 to December 2015.
On a broader scale, firms like Haywood Securities and Wood Mackenzie have pointed to factors like the strong US dollar and global economic uncertainty as negatively impacting the zinc price — those issues of course are currently affecting most commodities.
2016 zinc forecast: Strength in fundamentals
Despite zinc’s struggles in 2015, analysts and other market watchers believe that the metal’s fundamentals remain strong.
For instance, Wood Mackenzie states in a recent note that while issues like the ones mentioned above continue to dampen the zinc price, “[i]n actuality, nothing has fundamentally changed in the near-to-mid-term macro-zinc thesis and it does appear that zinc has been significantly oversold.” The firm also notes that “[t]he global zinc demand forecast remains strong,” with drivers including continued GDP growth in Asia, India, Europe and North America.
Similarly, Haywood Securities points out in its own note that “the zinc market continues to face a considerable medium-term (+2016) supply issue, as there are arguably no new large advanced-stage development projects poised to replace production capacity lost from [key mines like Century and Lisheen].”
Even major zinc miner Teck Resources (TSX:TCK.B,NYSE:TCK), which recently cut 1,000 jobs and reduced its dividend, believes the zinc story remains strong. In a presentation just a couple of weeks ago, the company asserted that the zinc supply situation is “fundamentally unchanged,” and said that it expects zinc demand growth to outpace supply.
Of course, strong fundamentals are of little help to investors waiting for a zinc price rise that’s been promised for the last couple of years. So what’s an investor to do?
For his part, Mark Cruise, president, CEO and director of analyst favorite Trevali Mining (TSX:TV), believes that it will be important to watch LME zinc stocks. He warned in a recent interview that now that so many big zinc mines have closed, drawdowns may happen quickly — indeed, he said, during zinc’s price run in 2005, major drawdowns occurred in four to six weeks, with the zinc price ultimately topping out at around $2.
Of course, even if such drawdowns are now inevitable, it’s tough to say when exactly they’ll happen. On that note, Pasinex Resources (CSE:PSE) President and CEO Steve Williams urged investors to be patient. “I am still very bullish on the zinc market,” he told the Investing News Network. “I do think that we are looking at a significant supply-side problem, and I do believe the price must go up.” He added, “I cannot tell when this will occur except to say that the longer time runs on, the more probable this is to occur.”
All in all, the International Lead Zinc Study Group is calling for for global demand for refined zinc metal to rise 1.1 percent, to 13.9 million tonnes, in 2015, and by 3.3 percent, to 14.37 million tonnes, in 2016. On the flip side, zinc mine production is seen rising 0.3 percent, to 13.55 million tonnes, in 2015, and by 1.8 percent, to 13.8 million tonnes, in 2016. That should work out to a surplus of refined zinc metal of 88,000 tonnes this year, and a deficit of 152,000 tonnes next year.
Investors may be getting tired of hearing that the zinc price is going to rise — just not quite yet. And it’s too soon to tell whether 2016 will indeed be the year that happens. However, it does look like the year could shape up to be an interesting one for the zinc space, and overall it may be a good plan to keep thinking zinc as the new year begins.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Pasinex Resources and Trevali Mining are clients of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Zinc Outlook 2015: ‘Crunch Time’ is Coming