In recent weeks, Zinc prices have decreased to reach the lowest levels for the metal in over two-and-a-half years. Having reached heights of over $4,500 per tonne in April 2022, zinc has declined by over 40% in the 13 months since and recently dropped below the $2,500/t mark for the first time since October 2020. At the same time, the International Lead and Zinc Study Group (ILZSG) noted an expected supply shortfall of 45,000 tonnes in its April 2023 report. While this figure has been revised down from the expected 150,000 tonnes in its October 2022 report, it still conflicts with the reality of zinc benchmark pricing at present. In this week’s blog, we will look at some of the key reasons behind the metal’s price slide and why it conflicts with the expected influence of a supply deficit.
Supply Balance - Mining and Refining
The changing balance in the supply of raw and refined zinc has been a key driver of the price fluctuations over the past few years, with the LME benchmark referring to the latter form of the metal. As was the case of many materials, production was reduced and supply chains disrupted during the Covid pandemic which led to upward pressure on prices. Mines were more affected by restrictions than smelting operations, gradually creating a shortage of raw zinc in the supply chain.
In late 2021 and early 2022, as most countries around the world gradually moved out from their Covid restrictions, the world’s zinc mining capacity rebounded in key countries. However, refining capacity for the metal hit challenges around the world. In Europe, refined zinc production dropped over 11% according to Reuters due to surging energy costs throughout the region, which worsened following the sanctions imposed on Russia. Many zinc smelters in China were exposed to power issues; droughts in Yunnan and Sichaun provinces reduced the generation of hydroelectric power in the regions and led to smelters being put offline, as Reuters reported.
At present, the treatment charges for zinc have risen to the second highest level in the last years which should incentivise smelting companies to increase their output. Consequently, many market participants foresee a rush of refined zinc to enter the market this year, the expectation of which has caused downward price pressure for the metal over the past few months.
It is worth noting that despite the current influence on prices, there are several weaknesses to the global zinc supply as well. As shown in ChAI’s graph above, although registered LME closing stocks of the metal have built slightly since February, they remain significantly lower than the average over the past 5 years. Meanwhile on the Shanghai Futures Exchange, stocks have been declining since early February. While supply may be increasing up the supply chain, there is limited official inventory to support further issues in processing the metal.
Another issue will be the extent to which Europe’s network of smelters can fully recover this year. Zinc refining is an extremely energy intensive process, hence why many of these plants were among the first casualties of the bloc’s energy conservation strategy last year following the removal of Russian gas. Europe made it through the winter largely unscathed but the unusually mild winter played a key role in this. As European nations again look to build their gas stocks ahead of the 2023/24 winter, it is as yet unknown how much energy will be available to heavy industry again, and indeed if it will be profitable for zinc smelters to come back online.
Global Demand Lacking
While the supply of refined zinc fell in 2022, the demand for it contracted as well. According to the ILZSG, global demand for the metal fell by 3.9% in 2022, with demand in China falling by 4.9%. As around two-thirds of global refined zinc is used to manufacture galvanised steel, the market for which is primarily driven by Chinese industry, these declines in demand weakened prices for the metal in the latter half of last year.
At the beginning of 2023, however, zinc prices experienced a month-long rally. This increase was due to widespread optimism that the relaxation of China’s Covid restrictions would create a post-Covid commodity boom, and many commodities in the industrial metals complex witnessed similar price movements. However, this sudden explosion of demand from China is still yet to materialise, and consequently zinc and other metals have lost a key source of demand and, therefore, upward price pressure.
The weakened demand for zinc cannot be ascribed solely to the slower-than-expected recovery of the Chinese economy. Around the world, macroeconomic uncertainty has been undermining demand for industrial materials. Whether connected to the regional banking system in the US or Europe’s continued transition away from Russian energy, there are factors undercutting industrial production across the globe. For example, ChAI’s ‘Macro’ data family is currently interpreting the most recent PMI indices from the US, where it was 50.2, and Germany, 44.5, as bearish drivers for zinc prices on the 6 month forecast. The ILZSG expects zinc usage to increase by 2.1% globally in 2023 - whether the renewed industrial demand required for this growth materialises, and what effect it might have on prices, remains to be seen.
