Zinc may rule firm till year-end on demand-supply mismatch

Subramani Ra Mancombu Chennai | Updated on September 17, 2021

Metal’s rates hovering near 3-year high; Fitch Solutions raises price outlook

After having hit a three-year high in June this year, zinc prices will likely rule firm for the remaining part of the year following demand-supply mismatch.

Rating agency Fitch Solutions Country Risk and Industry Research (FSCRIR), in a note, said it had raised the price outlook for zinc this year to $2,900 a tonne from $2,600 since the demand-supply mismatch had been “long-standing”.

The price outlook is in comparison with the World Bank projecting zinc price at $2,700 a tonne for this year in its commodity forecast and International Monetary Fund pegging it at $2,828 by the year-end.

Will the party last in key base metals?

Up 50% y-o-y

The white metal has gained over 12 per cent since the beginning of this year and over 50 per cent year-on-year. On Thursday, three-month zinc contract on the London Metal Exchange closed at $3,075 a tonne.

The metal, used in galvanising or coating by steel and iron industries to prevent corrosion, was available at $3,064 a tonne for cash. In June this year, zinc hit a three-year high of $3,085 on LME.

“While global refined zinc production has ramped up over recent months compared to 2020, it has been outpaced by demand,” said Fitch Solutions in its note.

New York-based firm Knoema Corporation said upward price drivers of zinc were disruption of zinc concentrate supplies due to the suspension of large zinc mines as a result of Covid-19, persistent environmental curbs in China and mine closures and disruptions in other countries and recovery of consumption in China, the US, and other countries due to resumption of construction activities.

After drop in prices, Chinese demand for industrial metals likely to stabilise

Demand seen up 4.3%

The International Metals Study Group, in its June despatch, said world demand for refined zinc metal was forecast to rise by 4.3 per cent to 13.78 million tonnes (mt) this year, after falling by 3.9 per cent last year. Supply of the metal was likely to rise by 5.7 per cent to 12 mt and refined zinc metal production would rise by 3.1 per cent to 14.13 mt. The Group said global supply of refined zinc metal would exceed demand by 353,000 tonnes this year.

Fitch Solutions said zinc prices have averaged $2,885 a tonne till now this year. Though prices had climbed down from the highs seen in June, they were still higher than what the market saw after 2018.

“We expect prices to stabilise and weaken from here on in the coming months, despite remaining elevated compared to historical standards,” FSCRIR said.

Surplus in Jan-April

The International Lead and Zinc Study Group said refined zinc surplus during January-April this year was 31,000 tonnes with the total reported inventories increasing by 142,000 tonnes.

Global zinc mine production rose by 11.3 per cent in the first four months, influenced by increases in Australia, Bolivia, China, India, Ireland, Mexico, Peru, South Africa and the United States, the Group said.

Knoema, quoting, said that global zinc surplus in this year could be 400,000 tonnes.

Fitch Solutions said demand was expected to be boosted by strong consumption from the steel sector in the coming months. Quoting World Steel Association, it said production increased 11.3 per cent year-on-year, suggesting robust recovery in galvanised steel output — the main demand source for zinc.

Supplies to improve

On the production front, FSCRIR said refined zinc output in China has begun to increase after being hampered by government-enforced power-rationing in Yunnan province, which accounts for 12.5 per cent of China’s annual refined zinc output, during May-June.

However, the market was expected to be better supplied in the months to come, capping prices. “Additionally, strong growth in zinc mine supply will result from expansions and restarts in key producers including Peru, Australia and Canada, which, in turn, will boost downstream refined zinc production,” the agency said.

This has begun to play out in the market with zinc treatment and refining charges increasing. Also, Yunnan has received good rainfall, enabling the local government to reverse production curbs.

In the long term, Fitch Solutions, World Bank and IMF all project a decrease in zinc prices, starting from next year.

Published on September 17, 2021

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