Zinc Prices Climb 7 Percent in January on Supply Fears

Zinc prices jumped more than 7 percent in January on the back of supply worries and declining stockpiles. 

The base metal started the year at a decade high, trading at $3,352 per tonne, and continued its uptrend throughout the month, closing January at $3,589.

Zinc inventories hit a 10-year low last month, fueling concerns about supply. In fact, Reuters reported that shortages of refined metal have seen stocks in LME-approved warehouses fall to their lowest since 2008.

“Prices will stay elevated because we have a market deficit that requires inventory drawdown,” Societe Generale (EPA:GLE) analyst Robin Bhar said at the time.

Similarly, ING (NYSE:ING) analyst Warren Patterson expects the zinc market to be “fairly tight” at least for the first half of the year, as investors’ fears over shrinking supply and a lack of new mine production continue to increase.

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 firm said last month.

As a result, Wood Mackenzie expects a deficit of 350,000 tonnes this year and 150,000 tonnes in 2019.

Meanwhile, a weaker US dollar, now at three-year lows, has also supported zinc. That’s because a softer greenback makes commodities priced in dollars cheaper for investors using other currencies.

In terms of demand, FocusEconomics analysts forecast an increase this year due to expected higher demand in markets including China, the European Union and the US.

“The trend of higher prices is set to continue as efforts by the Chinese government to crackdown on environmental pollution and improve mine safety has severely disrupted production,” analysts at the organization said.

Firms recently polled by FocusEconomics expect zinc prices to remain high throughout the first half of the year. They estimate that the average zinc price will be $3,170 in Q1 2018.

The most bullish forecast for the quarter comes from TD Economics, which is calling for a price of $3,475; meanwhile, Danske Bank (CPH:DANSKE) is the most bearish with a forecast of $2,800.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.