The zinc market isn’t copper and yet along with most base metals, zinc has risen strongly in recent weeks due to dollar weakness and a return to risk led among the metals by the tight and booming copper market. All the base metals have looked a little frothy in the short term. There is a lot of money chasing hedges against further dollar weakness and an enduring belief in the emerging market bull run continuing for the foreseeable future. But in reality what does the future have in store for zinc? We review some of the leading banks opinions and mix in some analysis of our own.
A reduction in LME inventories could lead us to assume the zinc market is getting tighter while at the same time zinc smelters are being closed in China to meet environmental and power consumption targets as part of the 11th Five Year plan suggesting the market is going to be squeezed for supplies. It is reasonable to suggest under those circumstances that the recent strength in the zinc price is less froth and more solid foundation so we thought a more thorough review was in order to see what is really going on and where the market may be leading in the years ahead.
LME inventory levels as we have seen with aluminum can be a bit of a red herring. It is probable that a portion of the zinc coming off the LME is heading back into inventory but off warrant in lower priced storage. A few players have control of a significant portion of zinc market inventory and as such their actions can have a misleading impact on headlines.
It is may be not surprising that even the large banks cannot agree on what the forward supply demand balance will look like. HSBC in a recent Global Metals & Mining Review noted that several major mines, notably Brunswick, Antamina and Century, between them worth nearly 1m tons of capacity will gradually run down during the first half of this decade. Yet at the same time, they note there are a number of sizable new projects planned for development during the same time period and unlike say iron ore, zinc mines have shorter development periods. As such the bank concludes there will not be any shortage of concentrates to the market. In addition, unlike many other metals, China has its own resources equivalent to some 30% of global supply meaning it will not make demands on global supplies in the way it has with say copper or iron ore.
Credit Suisse, on the other hand, focuses on the refining market and in its Commodities Quarterly draws on Brook Hunt research into Chinese smelter capacity to support a growing tightness in refined zinc supply. The research firm is expecting a cut in Chinese refining capacity of 400k tons per annum for each of the next five years. Apparently China has a three-year plan to close 400 kt of obsolete zinc smelter capacity starting with a list of 53 smelters with a nominal capacity of 294kt of zinc to be closed by the start of Q4. Possibly as a result, zinc refinery capacity utilization has increased slightly from 87% to 89%, but it still below the historical average of 95%.
We will continue our analysis of the zinc market in a follow-up post.