- Zinc demand-supply trends and its impact on LME prices
- Movement in inventory and other variables for the commodity
- Macroeconomic scenario and outlook
Zinc, the bluish-white metal, which finds its use in various alloys, chemicals and galvanization among others has not been in the best of phase in the last few quarters. The metal which was the top performer in the base metals pack in the recent years generated significant negative returns in 2018. A fall in the price of the commodity at the LME was mainly seen during the latter half (starting June), wherein the commodity ended (2018) down by over 25% as compared to 2017 closing. While the metal did touch a 10-year high during 2018, it could not continue the upward momentum amid easing supply issues and after taking into account the broader fall in base metals space, which was due to heightened trade tension between the US and China appended with moderately muted macroeconomic data in the major global economies.
Zinc registered back-to-back years of deficits, particularly in the last few years as a number of mines closed across major regions between the 2012-16 period, which hampered the mined and concentrate output, while eventually inflicting the metals refined supply globally. Although demand in the last few years has largely remained stagnant, supply-side issues pushed the metal into a deficit zone. Zinc recorded a shortage in five out of the last six years (2013-18 period), which is also reflected in the prices of the metal as stated above.
According to the provisional demand-supply numbers from ILZSG (International Lead and Zinc Study Group) for 2018, things did not look deteriorating for the commodity. Zinc seems to be recording another year of a deficit at ~350,000 MT, with refined consumption seen at 13.50 Mn MT and refined production standing nearly 13.15 Mn MT for the year 2018 (data extrapolated from the ILZSG report, with numbers available up to Nov., 18). Internally though, on a year-on-year comparison, the demand fell marginally by 1.4%, while mined and refined supply was almost stagnant. The only major change within was that the overall deficit of ~450,000 MT in 2017 is expected to reduce to ~350,000 MT in 2018.
Although, the scenario seems to be changing internally as persistently high prices of the metal incited miners to restart some of the closed mines, while fresh supply planned over the past few years is also starting to come online. 2019 could see a reasonable increase in the mined supply from Australia with the expansion of Century zinc mine by New Century Resources, increased production from Dugald River mine owned by MMG (started production in May 2018), Woodlawn Zinc-Copper mine (expected to start commercial operations in Q1, 2019) and Hellyer tailings project from NQ Minerals, which mainly focuses on gold extraction, though it would also produce zinc among other metals.
Brownfield and greenfield projects are also expected from South Africa, where Vedanta’s Gamsberg operation might add around 250,000 MT of zinc in-concentrate. The output is also seen to increase in Canada, India, Kazakhstan, Mexico and a few of the European countries among others. The above mines in totality are expected to add anywhere between 0.8 Mn MT to 1 Mn MT worth of mined supply over the medium term.
Considering the above factors, the demand-supply forecasts from the ILZSG (October report) suggest that the global zinc mine production could show strong improvement to ~13.85 Mn MT in 2019. The refined metal consumption seems to grow to ~13.90 Mn MT, while refined supply is anticipated to increase towards 13.80 Mn MT in 2019, producing a moderate deficit. However, the above numbers might see significant downward revisions if we take into account the actuals for the first 11 months of 2018 and look at the macroeconomic developments in the recent quarters. Televisory is of the opinion that while the percentage increase in the above numbers might vary, but still major supply factors may depict gradual ease out in the global zinc market.
When looking at other fundamental factors, the commodity is getting moderate support from LME, SHFE and off-market inventory scenario along with cash-forward movements. The total zinc inventory at LME saw an extended fall in 2018 and slide by ~30% to ~130,000 MT, while a similar drop was witnessed in the On and Cancelled warrants too. Inventory at SHFE, albeit at a low base registered even a high drop by ~70% to 20,000 MT by the end of 2018. LME and SHFE together accounted for around 25-30% worth of the total zinc inventories globally (exchange and off-exchange inventories combined). While Televisory could not ascertain the actual numbers and movements for off-exchange inventories, a drop was seen here as well during 2018. Separately, zinc spot and LME 3M/LME 15 M forward backwardation increased in 2018. The average backwardation for the metal stood at $28 and $101/MT between Zinc cash to LME 3M and LME 15M forward contracts, with a major increase seen in the final quarter.
Furthermore, if mined and indirectly concentrate supply increases in 2019 as proposed and anticipated by major miners, the situation might cool off a bit at least on the backwardation side, though effects on inventory normalisation might take time to actualise. The inventory numbers as stated above are associated with refined metal, where a complete shift from deficit to normalisation would not be that easy. Another aspect which aids to ease of supply is the treatment and refining charges (TC-RC) of the commodity. TC-RC charges extended its fall in 2018 with some estimates showing the number averaging around $150 per MT for the year. There are expectations that TC-RC charges could increase and stay around $200 per MT for the majority of 2019, indicating an improvement in mined availability.
On the demand side, most aspects are not supportive of any strong improvement as the metal’s major consuming space; steel in itself is expected to witness a modest growth in 2019. The data from World Steel Association show that crude steel output might increase in a low single digit on a year-on-year comparison for 2019. Moreover, growth in production and demand for steel and other major base metals is being revised to lower levels for the current year and the next as macroeconomic scenario does not appear much positive, which was the case a couple of quarters ago. The economic data on manufacturing, real estate and construction, industrial production, inflation and other related sectors also show negativity, including the world GDP forecasts, which was trimmed down by agencies like IMF and World Bank in the last few months/quarters. China, which is the largest consumer and producer of almost all the major commodities including zinc witnessed weakness in industrial and other sectors as depicted through the PMI, IIP and other data including the GDP data published for 2018, which grew by 6.6%, its weakest growth in nearly three decades and the forecasts are for further lower reading in 2019. The economic data is weakening in other key developing and developed economies as well, with the US expected to see lower growth in coming quarters, whereas Germany, which is Europe’s largest economy just managed to avoid a recession after its 4th quarter growth increased marginally (as per provisional data).
Thus, the scenario is not as optimistic for Zinc as it was in the last few years. A huge fall in prices in the second half of 2018 was a reflection of the commodity’s specific as well as macroeconomic concerns being raised globally. The speculative activity might increase for zinc in 2019, while volatility is also expected to be higher in terms of price movement as we get the actual picture on supply addition from miners. This would be the key factor to watch as mined supply would dictate whether zinc metal records amelioration in concentrate and refined metal supply or not while it is also related to smelters negotiation (on TC-RC charges) and conversion of raw metal in the final product. taking a cue from the past, while mine supply definitely seems to increase, the pace of growth may not be as steady as planned which may support the commodity against extreme bearish sentiment in the near-term. Zinc spot-LME 3M and 15 M backwardation are seen reducing, while TC-RC charges are likely to improve in 2019. Televisory expect zinc to mainly trade in a broad range of $2400 on the lower side to $3000 on the higher side during the next few quarters.