Zinc Market Galvanizes From Seven-Month Low

As June 2017 comes to a close, zinc prices have recovered to above US$2,700/t after posting a seven-month low of US$2,428/t on June 7. Price support has been provided by falling exchange stocks — both on the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) — U.S. dollar weakness, and an improved Chinese steel price, with the latter injecting some hope for a pick-up in demand for galvanized steel. In the final week of June, the SHFE rebar contract gained over 6%, largely ascribed to short-covering and new buying.

Commodities, including zinc, have benefited from the falling U.S. dollar, which has been aided recently by a delay in the U.S. healthcare bill vote and by comments from Fed Chair Janet Yellen that asset valuations are "somewhat rich." The euro also gained against the dollar on expectations of reduced European Central Bank stimulus later this year.

From a fundamental standpoint, S&P Global Market Intelligence sees the global zinc concentrates market continuing in deficit through 2019. As explained in the inaugural Zinc Commodity Briefing Service*, this deficit will feed into a shortage of refined metal, keeping upward pressure on prices. We forecast an annual average price of US$2,796/t in 2018, 2.4% higher than this year's expectation for US$2,730/t. Increased mine supply and smelter capacity utilization will return the refined market to balance by 2019, when prices are expected to slip back to average US$2,575/t.

We expect the refined zinc market to remain under-supplied, driven by metal tightness in China due to planned maintenance shutdowns and an ongoing concentrate supply squeeze. As a result, Chinese zinc prices have remained at elevated levels and in deeper backwardation.

Further indications of a tight refined metal market in China are the rapid draw-down of SHFE stocks and a continued fall in LME zinc inventories. The latter had declined to under 300,000 tonnes in late June, representing a 9% drop over the month and a 30% fall since the end of 2016. Furthermore, cancelled warrants represent over 70% of LME-held metal, exacerbating concerns over market tightness.

Outside China, zinc-in-concentrate production has increased so far this year. Higher output at Hindustan Zinc Ltd.'s Indian mines, a ramp-up at Bisha in Eritrea, and increased output at Peruvian operations following disruptive weather conditions earlier this year have driven this increase. 

Even in the absence of mine output from Glencore Plc's Australian operations, Mt Isa Zinc and McArthur River, we forecast global zinc-in-concentrate production growing 4.1% year-on-year in 2017, and by an even higher rate in 2018 due to new and returning mining capacity. This follows an estimated 8.0% fall in mine output in 2016. We expect further metal tightness in China this year and next, driven by limited concentrate supply. This could force some domestic smelters to curtail output. We are likely to see a continued draw-down in domestic stocks in third-quarter 2017, and we anticipate an increased flow of metal imports reflected in stock draw-downs outside China.

In terms of zinc demand, S&P Global Market Intelligence forecasts global year-on-year growth of 2.3% in 2017, and 2.4% in 2018.

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