The expectations of more demand and less supply resulted in zinc prices rising up to their highest in more than eight years, analysts said. The supply of the base metal has fallen due to a combination of mine closures and production cutbacks, pushing prices up.
LME zinc was up 2.1 percent at $2,725 a tonne, off an earlier $2,760–its highest since March 2008.
Last year, forecasts were that the metal’s fundamentals would remain strong, despite worries about shortages due to mine closures.
The jump suggests strong sentiment, although traders and analyst don’t see US President-elect Donald Trump’s $1 trillion infrastructure plan as a big deal for industrial metals.
Goldman Sachs analysts said that credit-fueled stimulus in China, aimed at infrastructure projects and policy driven supply curtailments in coal, has been the primary driver of recent gains.
On Thursday, the fourth most used metal gained nearly 90 percent since a 6 and a half year low of $1,444.50 in January.
Citi analyst David Wilson told the Financial Review: “There is a lot of Chinese money coming in and zinc has very strong fundamentals,
“We thought the zinc market would tighten through next year, the surge in speculative flows shows funds have jumped the gun on that idea.”
A closer look at zinc supply and demand
Approximately 14 million tonnes of zinc is produced and consumed annually worldwide. Almost 60 percent is used to galvanize steel (rebar, autos, structural steel) to prevent rusting and the rest is mostly used in die-casting, production of brass and bronze, and into oxides and chemicals.
In a recent report, the International Lead and Zinc Study Group estimated that the global demand for zinc will increase a little more than a half percent this year, to be followed by a larger increase of 2.1 percent in the coming year.
However, zinc mine production is expected to fall 5.6 percent this year and then recover by 5.9 percent next year, with the most significant dropoff coming from India, Australia, Ireland and Peru, the ILZSG reported.
Analysts also agree that tighter supply due to mine closures will continue. Top world producer China, that contributed to 37 percent of global supply last year, ordered to shut down 26 lead and zinc mines for environmental reasons.
According to a Reuters survey, the zinc market is expected to see a 400,000 tonne deficit this year, but this could easily be offset by inventories, which in London Metal Exchange approved warehouses stand at above 440,000 tonnes.
Hidden inventories, estimated at 1.4 million tonnes by Macquarie or about 10 percent of global demand, trickling into the market may also surprise zinc bulls.
What is next for zinc?
Goldman Sachs said in a note earlier this month that it expected zinc to outperform aluminium and copper over the next six to nine months.
Analysts led by Jeff Currie said on Monday: “The recent re-acceleration in global PMIs (purchasing managers’ indexes) suggests commodity markets are entering a cyclically stronger environment,
“Supply restrictions from policy actions should benefit oil, coking coal and nickel in the near term while economic reductions should boost natural gas and zinc.”
This week, the bank upgraded its rating on basic materials to overweight for the first time in four years.
Zinc stocks trending upward
Several zinc producers have been on a steady upward trend, year to date: Teck Resources (TSX:TCK.B,NYSE:TCK), owner of the Red Dog mine in Alaska, is up 555 percent; Glencore (LON:GLEN) is up 218 percent; Hindustan Zinc (BSE:500188), owner of the Rampura Agucha mine in India, is up by 85 percent; Trevali Mining (TSX:TV), owner of two commercially producing operations in Canada, is up by 168 percent; and Pasinex Resources (CNSX:PSE), 50 percent owner of the producing Pinargozu zinc mine in Turkey, is up 100 percent.
As well, several zinc-focused explorers have also enjoyed a three-digit lift in their stocks, year to date: Arizona Mining (TSX:AZ) is up 869 percent, Thunderstruck Resources (TSXV:AWE) is up 200 percent, InZinc Mining (TSXV:IZN) is up 161 percent, and Canadian Zinc (TSX:CZN) is up 133 percent.
Don’t forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Trevali Mining, Arizona Mining, Thunderstruck Resources, Pasinex Resources are clients of the Investing News Network. This article is not paid-for content.