Zinc prices are likely to rule at multi-year highs in 2022 in view of high energy costs due to the Russia-Ukraine conflict that continues to affect crude oil, natural gas and coal supplies.
According to Dr Heinz-Jürgen Büchner, Director of Industrials and Automotive, IKB Deutsche Industriebank AG, zinc prices will rule around $3,500 a tonne by the middle of this year, with a fluctuation band of $500 either way.
Close to 2006 record high
Research agency Fitch Solutions Country Risk and Industry Research (FSCRIR), a Fitch Unit, said it had raised the 2022 price forecast to $3,500 from $2,900 a tonne.
On Tuesday, benchmark zinc futures on the London Metal Exchange ended at $4,027. The metal - used in die-casting alloys, castings, chemicals, medicine, fertilizer, paints, batteries and other products such as brass - has gained nearly 14 per cent since the beginning of the year. Over the past month, it has gained 7.5 per cent, the Tradingeconomics.com website said.
Fitch Solutions said the metal has averaged $3,688 year-to-date. “At these levels, zinc is close to reaching its all-time high of $4,442/tonne reached in 2006. Our 2022 price forecasts imply that we expect prices to stabilise and weaken from here on in the coming months, despite remaining elevated compared to historical standards,” it said.
Output under pressure
In October last year, the World Bank, in its commodity forecast, said the average price of zinc will fall to $2,400 in 2022 against $2,700/t at the end of 2021. But the Russia-Ukraine conflict has changed the market fundamentals.
As Russia-Ukraine conflict prolongs, prices of industrial raw materials soarFrom crude oil to coal to steel, rates have increased sharply since February 24
Fitch Solutions said global refined zinc output continues to be pressured, as major producers Nyrstar and Glencore have announced a cut in production on the back of the energy crisis in Europe.
“Most recently in March, Nyrstar restarted the Auby zinc smelter in France but stressed that high electricity prices still hinder the smelter’s full production, and the restart of the smelter is more due to government subsidies,” the research agency said.
Severity of supply shock
Energy costs have soared since February 24 when Russian troops entered eastern Ukraine. Prices of energy commodities such as crude oil, natural gas and coal have been swinging wildly over the past month. Though crude oil and natural gas have gained, coking coal has dropped after having topped $500 a tonne at one point of time.
ING Think, the financial and economic analysis wing of Dutch multinational financial services firm ING, said zinc has been caught in the web of aluminium, which is the primary metal to be hit by the energy crisis.
Shanghai Metals Market (SMM) news said aluminium and zinc ranked higher in terms of severity of “supply shock” that is likely to continue and become the main price moving factor.
From surplus to deficit
Fitch Solutions said it expects the steel sector consumption to boost demand for zinc in the coming months, though the demand growth would start slowing. Crude steel production growth is likely to be similar to last year at 3.4 per cent (3.6 per cent in 2021) and this suggests robust growth in production of galvanised steel, which is the main source of demand for zinc.
IKB Deutsche Industriebank’s Büchner said zinc faced a supply deficit of 1,00,000 tonnes in 2021 after a surplus of 5,30,000 in 2020. Though stocks with LME and Shanghai Futures Exchanges correspond to six days of consumption, the overall supply was satisfactory.
SMM said total zinc inventories in the domestic market got reduced in view of the curbs announced by the Chinese government to tackle the Covid-19 pandemic that has resurfaced. It expected zinc prices to rise further in the next quarter.
Mine supply to rebound
Fitch Solutions said the Chinese production has begun to stabilise after being hampered by government-enforced power-rationing in Yunnan province last year, but the output is not back to past levels as yet.
But the research agency said it expects a strong growth in zinc mine supply resulting from expansions and restarts in key producers, including Peru, Australia and Canada. This will eventually boost downstream refined zinc production later in the year.
Indeed, this has already started to play out with an increase in zinc treatment and refining charges in China, as a result of better ore availability, FSCRIR said.
In the long term, zinc prices are likely to head south as production is projected to outstrip consumption growth, which could be subdued.