Last year, zinc prices increased almost 30 percent on the back of supply concerns, declining warehouse stocks and a positive Chinese demand outlook.
In 2018, the base metal kicked off the year at a decade high, with LME zinc closing at $3,389.50 per tonne on Wednesday (January 24). Prices are up almost 5 percent year-to-date, and many experts believe they will continue to perform well in the coming months.
Most recently, analysts at Wood Mackenzie released a report on five key factors to watch in the zinc market this year. Read on to learn what they had to say.
1. China’s environmental crackdown
In 2017, China imposed tough environmental regulations to fight pollution, causing mines and smelters to shut down. Supply concerns impacted prices, and many believe that could happen again in 2018.
“The Chinese authorities are expected to maintain their strict stance on the environment in 2018,” the Wood Mackenzie analysts say in the report, as the majority of suspended mines have yet to meet the government’s environmental standards.
“It seems unlikely that many mines will have the immediate funds to invest in complying with environmental regulations and there is little chance of them returning to production in 2018 despite the high lead and zinc prices,” the analysts also note. However, they warn that opportunistic investors may step in to provide the funds for environmental upgrades.
China’s zinc smelters will also face environmental pressures in 2018 — residues produced by the process are now being classified as hazardous waste by the government, and are subject to an environmental tax. “A key risk for 2018 is whether these smelters will run into residue storage capacity constraints and be forced to reduce output,” the analysts explain.
2. Production restarts and new mine supply
According to Wood Mackenzie, zinc mine supply is forecast to grow by 664,000 tonnes this year, following an estimated increase of 785,000 tonnes in 2017.
“However, the extremely strong growth in mine supply in 2017 and 2018 is insufficient to replenish global stocks of concentrate which are forecast to remain at critically low levels,” the analysts say.
That said, they predict that this year will be characterized as another year of very low stocks of zinc concentrate. “[That] will leave the market very sensitive to any unforeseen production disruptions over and above the 4 percent typically seen,” they add in the document.
3. Smelter utilization rates
Another key factor to watch this year will be whether smelters in China can increase utilization rates to meet the steady growth in zinc demand.
The Wood Mackenzie analysts believe that there will be enough mine supply to allow the world’s zinc smelters to boost output by 6.5 percent. “Such an increase in utilisation rates is achievable provided smelters can secure sufficient concentrate of the right type, at the right time and the right price,” the analysts suggest in the report.
According to their analysis, Chinese smelters will have to increase utilization rates by 7 percent in 2018, while smelters from elsewhere will need to raise it by 5 percent. “If smelters are not successful in increasing output in 2018, the more significant consequence would be a larger deficit in the refined market and the consequent upside risk to the price,” they add.
4. Thrifting and substitution
As constraints on smelter production limit growth in the supply of refined zinc to the market, the analysts believe demand will draw down inventories of existing metal. That decline will provide support for further price rises and an escalation of spot premiums.
But higher prices could pose a risk for zinc consumption. In fact, the increase in zinc prices is likely to encourage consumers to investigate the potential for reducing or even eliminating the consumption of zinc, the analysts explain.
“While thrifting and substitution represent a significant downside risk to zinc demand, this risk is a long-term one and unlikely to have sufficient impact to rebalance the refined market in 2018,” they note.
5. Refined zinc stocks
With all the factors mentioned above in mind, Wood Mackenzie is certain that the zinc concentrate market has tightened. But the question remains as to when will this result in stocks of refined zinc falling to critical levels and impacting prices.
“The assumption is that developments in metal stocks and price will be coincidental with refined metal stocks falling below the critically low-level equivalent to 40 days of global consumption at the end of Q2,” the analysts say. As a result, they expect prices to climb to $4,000 in the third quarter and $4,100 during the first three months of 2019.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.