Will the supply of zinc drive its future?

• Key factors that drove the zinc supply
• Did offloading play a major role?
• How China influenced the demand for the metal?
• Why will zinc be in deficit in 2017?

In 2008-09, during the recession all base metals prices declined significantly (~30%). However, even after 7-8 years most of these are unable to recover and reach the pre-recession levels. The prices are still hovering around recession levels. Moreover, zinc also followed this trend up to 2015, but, it emerged as the best performing metal in 2016 and H1 2017. While prices for other base metals, particularly copper, aluminium and nickel witnessed a marginal growth, however, the prices for zinc jumped by ~50% since early 2016, which was driven by a change in supply side dynamics.

Zinc was in surplus alike to most metals since the recession. Although, its trajectory changed slightly during 2013-14 when it was in deficit. In 2015, the commodity moved to marginal surplus but was again in deficit in the year 2016 and this continued well into 2017. The demand for zinc augmented by ~3.6% (2012-16) and considering the past trend, this seemed a normal increase for the zinc industry (the 4-year period of 2006-10, witnessed a similar increase of ~3.8%). On the contrary, zinc’s production in 2006-10 jumped ~5%, while in 2012-16 there was an increase of mere 1.9%. Hence, the contraction of supply in the past few years propelled the prices of the metal.

Furthermore, few key factors that drove the supply in the industry were the depletion of resources, scarce finances and reluctance of producers to fund large-scale projects. These elements were realised when Glencore, a top zinc producer announced the closure of its Brunswick and Perseverance mines in Canada (2013). This was followed by the shutdown of Century mine in Australia, Lisheen mine in Ireland, etc. Therefore, since 2013, the closure rate due to mine exhaustion increased significantly. Cumulatively the 2013-16 period saw ~2 million MT offloaded from the market, out of this ~45% was solely offloaded in 2016. Thus, resulting in a significant jump in prices during 2016.

In addition to the closure of mines, there were deliberate production cutbacks from companies (in 2015 due to low prices). Primarily, mines were shut in Canada, Australia and Ireland, this impacted the production and a decline was seen in these regions. The production of zinc in South America, Oceania and Europe slumped by ~1.4%, 1.6% and 0.3% during the 4 years (2012-16). However, the global zinc production marginally increased by ~2% (2012-16), mainly driven by improved production from Asia. 

This ~2% increase in production was certainly insufficient to meet the demand which increased by ~3.6% during the above four years period. This incremental demand came predominately from China, where the demand surged by ~5.6% as the development of infrastructure was the major focus. Additionally, almost 60% of the zinc demand emanates from the steel sector where the commodity is used for galvanization of steel for prevention of rusting. Steel (or in a way zinc) is the primary input for infrastructure development and there was a consistent demand for the metal from China. 

Hence, in order to meet this increasing demand, given the inadequate supply, the industry resorted to consumption of the surplus inventory piled up during the foregone years. In the 2012-16 period, the stockpile dried up by ~22%. This was also reflected in the stock to consumption ratio for the commodity, which dipped from ~18% (2012) to ~10% (2016).

In 2017, there seems to be a follow-up of the same demand-supply trend (as depicted in the chart below). Zinc production in H1 2017 fell short of its demand in the same period.

Extrapolating from the numbers, it can be said that the metal will be in deficit in 2017. Therefore, the outlook looks bullish in the short term (next 3 to 4 months) and the price is expected to hover around $2800-3100 per MT. However, the sustainability of price depends on the demand-supply balance in the medium term. China continues to focus on its infrastructure, therefore, the demand for steel and in turn for zinc is expected to rise consistently in the near to medium term. Likewise, the United States priority to rebuild its infrastructure is expected to provide a fresh boost to zinc demand. This depends on how this plan will materialise for the nation, the demand for zinc is expected to grow at least at the historical rate in the medium term.

Hence, the key driving force in the industry will be the supply of zinc. The global mined supply of the metal fell short of the demand, this affected the refined supply either because of the closure of mines that were unviable economically or depleted or deliberate production cuts by companies. The exhausted resources are not expected to be revived in the short term as no player has yet declared a major capex plan. Consequently, even if any such announcement is made in the short term, it is unlikely to have an impact on the zinc prices in the short to medium term. Thus, the entire supply side is dependent on the production recommencement from players, which closed operational mines to drive prices. However, presently, these do not appear to restart production. In 2015, Glencore cut down its production by 0.5 million MT, while other miners too announced temporary cuts due to lower prices. Thereby, despite an upsurge in prices early this year, Glencore announced (2^nd Feb. 2017) that its mines will remain shut as long there isn’t a conducive market atmosphere to restart the production. If the firm resume production early next year (in the medium term), the deficit is expected to balance out or might convert into marginal surplus. This will certainly call for a correction in the medium term.

Therefore, though 2017 (near term outlook) looks bullish for the commodity, there is a high probability of players restarting production early next year and this makes the medium-term outlook cautiously bullish for zinc. 

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