Zinc Prices Hit 14 Year High as Power Costs Rise

As a result of higher power prices, zinc smelter Nyrstar has outlined plans to cut production by 50 percent at three European operations.

Zinc hit its highest level in 14 years on October 15, surpassing the U$3,900 per tonne level.

The rally was supported by soaring power prices and costs associated with carbon emissions, which are behind zinc smelter Nyrstar’s (EBR:NYR) plans to cut production by 50 percent at three European operations. The combined capacity of the smelters is around 700,000 tonnes per year.

For Helen O’Cleary of CRU Group, the timeline and extent of cuts are both unclear, but could tip an already tight market into deficit this year.

“Prices are expected to remain elevated, and metal premia for next year’s annual contracts will reach a multi-year high,” she told the Investing News Network (INN).

zinc price graph

Zinc price performance, December 2020 to October 2021. Chart via the London Metal Exchange.

Commenting on the Nyrstar announcement, Wood Mackenzie Principal Analyst Jonathan Leng said a fundamental question around these production cuts is whether they relate to slab production, or are just a modulation of operating rates at times of peak power prices.

“If it is just a case of cutting power consumption to the tankhouses at times of peak power and the company’s five roasters remain operating, then this may only amount to a small cut of say a few thousands tonnes of slab zinc production per month,” he told INN.

He said the news would be more notable if it included shutting one or more of the five concentrate roasters at the three smelters, and a reduction in tankhouse operating rates for sustained periods.

The move by Belgium-headquartered Nyrstar, one of the world’s biggest zinc producers, could lead to cuts by other metals producers, and they could also consider moving operations away from Europe.

“Other smelters in Europe will also likely follow suit, especially the smaller ones, particularly if (they are) more exposed to the spot power market. It remains to be seen whether the cuts will be significant,” Leng said. “What would really drive the price higher is if a smelter is suspended — this would be a clear and quantifiable cut in output.”

Glencore (LSE:GLEN,OTC Pink:GLCNF), another top zinc producer, is also monitoring the situation in the region, and is evaluating options to deal with the power crisis. The Anglo-Swiss mining giant has around 800,000 tonnes of European zinc capacity.

“With Glencore announcing similar action, it remains to be seen as to how significant these cuts will be to refined zinc output,” Leng said. “But importantly, exchange stocks remain historically low, so any cuts will be supportive of the zinc price.”

Power rationing is a global issue, the expert pointed out. “Countries such as China and India have the potential to trigger even bigger cuts to zinc production.”

Zinc demand has come back strongly this year, especially in Europe, with Wood Mackenzie expecting this to continue into next year.

“The US has seen slower growth, but this is due in part to a smaller drop in demand last year,” Leng said. “For the biggest consumer, China, it has seen lower investment in infrastructure, which has contributed to a moderation of demand growth.”

CRU’s O’Cleary agreed, saying demand has rebounded more strongly than expected in Europe and the US, and this is set to continue in Q4.

“Some demand weakness materialized in Asia ex-China in recent months due to COVID-19-related restrictions, but Q4 should be stronger as restrictions are eased,” she said. “In China, demand in Q4 will weaken on the back of power restrictions at some end users and the construction sector slowdown.”

Overall, global zinc demand has recovered well this year, and is up by 7 percent following last year’s 4.8 percent contraction, according to CRU data.

“The global market is likely to register a modest refined metal surplus this year thanks to State Reserve Bureau stock releases of 180,000 tonnes so far and more expected,” O’Cleary said. “Next year, we expect the refined market to register a small deficit.”

Assuming that there aren’t any major cuts to smelter production, Wood Mackenzie is forecasting that the refined zinc market will be balanced or have a small deficit this year, and similar in 2022.

Looking into what could happen to zinc in 2022, the firm is expecting high power prices to persist into Q1 and only ease in Q2, so cost pressure is expected to be maintained on smelters.

“This should help to support the price at where it is now, with any further news of cuts being a major upside risk to prices,” Leng added.

Meanwhile, CRU is expecting to see a correction from these high levels, with zinc prices in Q4 of this year expected to average US$3,300.

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: 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.

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