- Demand-Supply scenario of the metal during the past few years
- TC/RC rates rise to decade high levels in 2019, indicating better mined availability
- Expected supply movement in 2020 and impact on price
Zinc prices at the LME have recorded a roller-coaster performance for the past few years wherein the metal started its upward journey in 2016, riding higher from sub $1500/MT levels to more than doubling to ~3600/MT levels during Feb 2018. Zinc LME price marked strong back-to-back gains in 2016 and 2017 whilst touching its best levels in more than a decade during early 2018. The commodity, which has wide usage in construction, automotive and chemicals sector amongst others ran through its best phases, led by supply side tightness while demand continued to grow at a slow pace. Expectations that the metal would see deficit led to the rise in prices. However, things started to cool off in 2018 with the metal sliding down by ~31% to close around the ~2450/MT mark as compared to its peak price of ~$3575/MT. Year 2019 was filled with volatility though zinc ended the year weaker by nearly 6% against Dec 2018 closing.
The movement in the commodity in the past years has been more of a supply side story, with fall in price in the last 6-8 quarters being weighed by anticipation that fresh supplies would start coming-in as a number of mining projects become online in 2019 and 2020. If we look at the actual demand supply numbers, the commodity continued to remain in deficit in 2019, though the size of shortfall reduced by ~1/3rd from a deficit of 0.52 Mln MT to 0.19 Mln MT in 2018 and 2019 respectively. As per data from ILZSG, zinc mined production in 2019 increased modestly by 0.9% to 12.90 Mln MT driven by strong increase from Australia and Canada while China registered a marginal increase of 1% and stood lower than expectations. Rise in output in the above countries was offset by drop in production in the US, Europe, India, Peru and Kazakhstan amongst others making the net increase by under a percentage. Refined production, however managed to gain by 2.8%, mainly led by firm 8.8% growth from Chinese smelters. Growth would have had been further higher if other major producers also managed decent increase or even a stable production as world ex-China saw a decline by 1.8% in refined output which was also largely blamed to the bottlenecks at the smelters side and not due to the unavailability of mined material. Consumption was broadly stable around the 13.7 Mln MT level when compared on a YoY scenario pushing the deficit lower. China continues to be the major center for both refined production and demand, controlling 46% of the global production and 48% of the global demand.
The overall demand supply statistics don’t look very unhealthy if we look at the numbers in 2019 along with the position on the metal inventory as reported by the ILZSG. Total inventory for zinc, inclusive of producers, consumers, merchants, exchanges and SRB (China's State Reserve Bureau) has come down to 0.82 Mln MT, which as a percentage of consumption stands pretty low near the 6% levels in 2019 as compared to over 10% mark in 2015 and 2016. Inventory at the LME and SHFE warehouses at the end of the year 2019 (79,000 MT) was just enough to match 2 days of global consumption. Although the inventory numbers have increased in the last couple of weeks in 2020, they still suffice only a few days of consumption. Consistent decline in inventories aligns with the scenario, wherein fall or slow rise in production over the years failed to match with stable consumption numbers, which was eventually compensated through drawdown in exchange stocks.
Nevertheless, data from other reports portrayed a different view to the above numbers. Strong refined output in China during the past year, other than getting into the mainstream also resulted into increase in off-warrant stocks which as per news reports stand around a million MT. As per a Nov article from Reuters, “Macquarie estimates that at the end of October there were 940,000 tonnes of “invisible” zinc stocks, consisting of inventories in non-exchange warehouses and in the supply chain.” This is a very high number and dwarfs the official reading at the LME and SHFE warehouse.
Separately, other indicators regarding the TC/RC (Treatment and Refining charges) also depict ease in mined material availability in the market. On one side, lower than expected mined output in China and other countries during 2019 should have weighed on the TC/RC for the major refiners in different parts of the world. Contrary to the same, contracts between miners and refiners showed rising trend in charges with the same gaining decent strength especially in 2019 moving to best levels in the decade (TC/RC charges moved higher towards $280-300 /MT levels). This indicates ease in the market in terms of ore and concentrate supply and also makes a case for further increase in supply of zinc ore in the future. The same aspect is also reflected from the higher smelting activity in China and some other nations during the past year and as reflected into the refined production in 2019.
Forecasts from ILZSG for 2020 show, global zinc mined output is expected to rise to 13.64 Mln MT in 2020. This is seen driven by strong increase in Australian output during 2019 and further increases coming from India, Kazakhstan, Mexico and Portugal amongst others. Projects in China and India have seen delay in output wherein some of the production planned to come in 2019 would be added in 2020 further supporting the view on mined output increase. Though the number is likely to see downward revision as ILZSG had also forecasted for a marginal rise mined output in 2019 towards 13 Mln MT levels. Actual numbers have come lower than expectations and thus should force the expectations for 2020 also to be revised. Refined output and consumption are seen increasing at a decent pace as compared to 2019 numbers wherein the bluish-grey metal may see its first surplus situation in 2020 after 3 continuous years of deficit.
The aforementioned aspect is already visible in the price of the commodity which has been falling relentlessly since the start of the year. Zinc LME quotes under $2030 /MT mark as per the latest reading, down by around 12% YTD (25th Feb 2020), its lowest level in last 3 and half years. The tone for the commodity is expected to continue to be negative for the short to medium term though prices are reaching to a level wherein it would start hurting miners. Any significant decline toward $1800-1900/MT mark may force miners to cut output which indirectly may arrest any further bearish sentiment. This, conjugated with the fact that industrial and manufacturing related data, namely, PMI, industrial production, housing and construction output, factory orders amongst others is not faring very well in major global developed and developing economic over the last few quarters; no major respite is expected on the demand side as well for the commodity. Zinc prices are expected to continue trade on a weaker note for the next few quarters with the broad range seen between $2200 on the higher side to $1800/MT on the lower side. Sentiment may see a change; in case we see a fresh round of stimulus measures coming in from the bigger economies in the world, both in terms of monetary and/or fiscal side or mined output witnesses any meaningful cut, due to any unforeseen event.