Zinc demand, usage may rise despite prices surging to 3-year-high

Global demand for refined zinc will likely increase by 6.2 per cent this year, while refined zinc usage will rise 2.1 per cent this year despite zinc prices surging to a three-year high over the past few days as smelters in China and Europe have cut output due to surging power costs.

The prices, which have increased 18 per cent since the beginning of this month topping $3,500 a tonne, have gained on the heels of one of world’s leading metals group Nyrstar announcing that it will cut its production by 50 per cent at its three European smelters. Prices are expected to rule firm until the power crisis is resolved.

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Chinese smelters have also pruned their output quite a few times over the past few months as the Communist nation suffers one of its worst power crises, mainly since coal prices have skyrocketed.

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On Thursday, zinc for cash quoted at $3,550 a tonne on the London Metal Exchange, while its three-month contract closed at $3,528. Zinc prices have increased about 45 per cent since the beginning of this year. Also, zinc prices have increased despite the Chinese state reserve bureau releasing 1,80,000 tonnes of the metal to control its spike.

“All in all, a tight concentrate market and rising disruptions in the refined end amid low inventories are the major fundamental drivers behind the strong zinc market. Prices could stay elevated at least before the current power crisis dissipates,” said Wenyu Yao, Senior Commodities Strategist at Dutch multinational banking and financial services firm ING’s economic and financial analysis Think, in a note.

Refined zinc demand, usage

At its 66th session held a week ago, the International Lead and Zinc Study Group (ILZSG), an inter-governmental organisation founded by the United Nations, forecast global demand for refined zinc to rise to 14.09 million tonnes (mt) and to 14.41 mt next year. The group said refined zinc usage would not see a similar growth as the Chinese galvanising industry had slowed down its activities in July and August after a robust first half of this year.

But demand recovery is likely in Europe, where refined zinc demand will rise 8.5 per cent on increases in France, Germany, Italy, Norway, Russia and the UK. However, usage will rise only by 2.8 per cent, it said. Demand for refined zinc is also expected to increase this year in India, Brazil, Japan, Taiwan, Thailand, Turkey and the US.

Monthly metal loss

According to ING Think, the current energy crunch in many regions is taking its toll on refined zinc supply.

“Altogether, we estimate that there could be around 40,000-50,000 tonnes losses of zinc metal per month. Simultaneously, some smelters in China have also been hit by power rationing. As a result, refined zinc production growth from China is likely to fall short of expectations,” Yao said.

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ILZSG said global zinc mine production was predicted to increase by 4.7 per cent to 12.85 mt this year with the most notable rise coming from Bolivia, India, Mexico, Peru, South Africa and Kazakhstan. In particular, Kazzink had begun production at its 150,000 tonnes a year Zhairem mine in Kazakhstan from May. However, a drop in production in Brazil, Nambila and Poland will offset these gains.

Concentrate supply

ILZSG said supply of zinc concentrates will rise by 2.3 per cent this year, while global production will rise 5.9 per cent. On the other hand, global refined zinc metal production will likely increase by 2.5 per cent to 14.13 mt this year.

The rise in production is projected due to an anticipated 3.2 per cent growth in Chinese output and further rises in Italy, India, Japan, Peru and the United States. Production is expected to fall in Canada and the Republic of Korea and to remain more or less unchanged in Australia.

But ING Think said if the power shortage in China lasts longer, it would increase the risks of further supply losses from both China, the world largest zinc producer, and Europe.

Supply to exceed demand

“True that power shortage is also hitting demand downstream such as alloy makers and galvanisers, but supply disruptions could outweigh the demand destruction at this stage as energy intensity per tonne of production in the smelting sector is outpacing their downstream in the value chain,” Think’s Yao said in her note.

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ILZSG said it expects refined zinc supply to exceed demand and the metal’s surplus is forecast at 2.17 lakh tonnes. The development in the global zinc market has helped Hindustan Zinc Limited stocks in India to gain from this price trend. The stocks have increased by about 55 per cent this year. On Thursday, the stocks gained 14.05 per cent at ₹346.90. BusinessLine has recommended that investors hold on to these stocks.

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