Zinc Price Trends and Forecast
Following the results of Q1 2020, the average LME price for zinc has fallen by 21% to $2,128/t compared to the same period in 2019. After the rapid growth at the end of January 2020, caused by signing “phase one” trade deal between the USA and China, the zinc prices took a plunge. The COVID-19 outbreak coincided with the start of the Chinese New Year holidays raised the market players’ concerns about a possible fall in zinc demand. With the virus spreading, the Chinese government proceeded to impose restrictions on individual mobility, and production activity was reduced to a minimum. Such restrictive measures had a severe impact on the Chinese economy. GDP of China in Q1 2020 has dropped by 6.8% on year-on-year basis after a 6% rise in the previous quarter (according to China's National Bureau of Statistics). Based on the projections of economists surveyed by Reuter, in 2020, China’s economy will climb by 2.5% (the minimum rate in almost 50 years), however, IMF expects only a 1.2% growth.
Between January and February 2020, zinc concentrate output in China has contracted by 12% to 517 kt compared to the same period of the previous year. Nevertheless, TC rates, which remained high, increasing zinc concentrate imports (+19%, to 332 kt) and sufficient warehouse feedstocks allowed Chinese zinc producers to boost zinc output in the specified period by 12.6%, to 1.02 Mt.
COVID-19 started to have tangible impacts on non-Chinese markets already in March when major zinc mining countries (Bolivia, Peru, Mexico, India) have announced containment measures and nearly halted any activity in mining and metal’s industries. This resulted in disruptions to global concentrate supplies and started to affect the key zinc concentrate importers, such as China, where, production activity is currently recovered. Due to a decrease in material availability in the Chinese market, the average TC rates (zinc spot concentrate TC, cif China, $/t) for zinc concentrate treatment have lowered from $298 to $263 per ton by the end of Q1 2020.
Average LME zinc stocks in Q1 2020 were at the level of 65 kt, which is 29% lower than in the same period in 2019. However, at the end of the quarter they have risen up to 74 kt (+44% relative to 2019). Metal availability in the market has widened due to sluggish demand of consuming industries. Sales of new cars have been dramatically slashed in the key markets including China, Europe and the USA. According to LMC Automotive, in March, the global sales of passenger cars have fallen by 38% on year-to-year basis. In Europe, over a hundred automotive assembly plants have been closed. In the USA, such automakers as General Motors and Ford have also announced a temporary shutdown of car manufacturing.
Factors with a positive impact on zinc price:
- Steadily low metal stocks inside stock exchange warehouses compared to the previous periods;
- Disruptions to global zinc concentrate supplies to the top importers since COVID-19 pandemic caused a shutdown of major zinc mines;
- Existing environmental pressures in China, closure and interrupted operation of mines in other countries;
- Recovery of zinc consumption in China due to implementation of infrastructure projects (construction of railways, airports, subway lines etc.).
Factors with a negative impact on zinc price:
- Global market, turning shortage into surplus. According to our estimate, in 2020, zinc surplus in the global market may amount to 400 kt;
- Mining restart in the largest zinc mines in Peru, Mexico, and Bolivia etc;
- Growth in zinc mining and output in China by progressively replacing and improving old zinc smelting facilities, which are capable of complying with new environmental standards;
- Slowdown in economies’ upturn of some developed and developing countries caused by trade wars and COVID-19 pandemic impact.
As long as business operations are restarted in different parts of the world and containment measures are lifted, zinc prices will recover the losses. The prices are expected to gradually grow. In 2020-2021, projected average zinc price will be come out at about $2,000 – 2,150 per ton.
In the long run, zinc prices are expected to rise up to the average levels of $2,300-2,500 per ton. Closure of inefficient productions with current low prices may have a positive impact on zinc price, which will allow the market to be balanced.
Global Zinc Market Indicators and Forecasts
Following the results of the first two months of 2020, global zinc market was 188 kt oversupplied, while in the same period in 2019, the surplus amounted to 45 kt.
It is expected that at the end of 2020, global zinc market will be 387 kt oversupplied.
Following the results of the first two months of 2020, global zinc mine output added up to 1.964 Mt, which is 3.3% higher than in the same period in 2019. The growth was associated with the increase in zinc mine output up to 234 kt (+21%) in Australia, up to 127 kt (+18%) in Mexico, up to 244 kt (+17%) in Peru, and up to 31 kt (+182%) in South Africa.
Zinc mine production in China decreased by 12% to 517 kt as a result of numerous shutdowns of zinc mines brought about by measures taken to curb the spread of the coronavirus (COVID-19).
According to the data for Q1 2020, Glencore produced 252.3 kt of zinc concentrates, which is 13.6% higher than in the same period in 2019. Most of this growth was related to the increase in zinc output from the Iscaycruz mining area (the Antamina mine, Peru), where mining operations recommenced in Q3 2019.
Teck Resources, a Canada’s miner, augmented zinc concentrates production in the Red Dog mine by 17% to 128.4 kt. The growth was attributed to a low base in the same period in 2019 caused by extreme weather conditions.
KAZ Minerals also ramped up zinc concentrates production by 45% to 9 kt, which resulted from the rise in zinc output in the Artemyevsky and the Bozymchak mines.
Zinc quoted prices, turning negative, and high TS rates observed in Q1 2020 tend to cut profit margin of miners and pose a threat to further high-cost mining operations. At the same time, compulsory shutdowns of mines in countries marked by high zinc mine output (e.g. Peru, Bolivia, and Mexico) in March 2020, resulting from quarantine measures taken by governments, contributed to zinc concentrates supply reduction in the global market and as a result, TS rates skewed to the downside.
Due to the spread of the coronavirus and a drop in zinc price, zinc mine output in 2020 is estimated to fall by 500-600 kt. Thus, global zinc mine production is expected to grow by only 2% to 13.1 Mt this year.
Following the results of the first two months of 2020, zinc production was on the climb by 7% and stood at 2.259 Mt. The growth was mainly driven by production increase in China (+12.6% to 1.02 Mt), Mexico (+18% to 72 kt) and India (+8% to 121 kt).
According to the data for Q1 2020, Glencore ramped up zinc production in Kazakhstan (Kazzinc*) by 7.4% to 43.3 kt, which became possible due to a low base in the same period in 2019 caused by proceedings on industrial safety issues in the Tishinsky mine. Production at captive smelters (with a 100% ownership ratio) was on the downside by 1.8% and totted up 239.2 kt.
During the period under review, Boliden manufactured 127.3 kt of zinc, which is 4% higher than in the same period in 2019. The company owns two zinc plants in Kokkola (Finland, 300 kt) and Odda (Norway, 200 kt).
Majority of zinc plants continue to maintain their production levels despite the spread of the coronavirus. Most of the closures and production curtailments around the world took place at the smelters including Peru (Nexa Cajamarquilla, 350 kt), Mexico (Mexico Industrias Peñoles, 350 kt), India (Hindustan Zinc Limited, 830 kt), and China (Yuguang Zinc Industry, 300 kt). It is estimated that the cumulative loss of zinc output in 2020 could be between 100 and 250 kt.
In the short term, zinc production will be affected by a steep decline in demand in consuming industries and a temporary shortfall of feedstocks (i.e. zinc concentrates). Therefore, global production growth in 2020 will be rather modest, and is expected to rise by 1.7% to 13.7 Mt.
Following the results of the first two months of 2020, zinc consumption went up slightly by 0.2% to 2.07 Mt.
The COVID-19 will have a greater impact on demand rather than supply. Galvanized steel use in the automotive and construction industries is expected to decline. In its latest forecast, LMC Automotive forecasts that global sales of passenger cars in 2020 will fall by more than 20% to 71 million cars. Likewise IHS Markit expects global sales to drop by 22% to 70.3 million.
According to various estimates, a global demand recovery is possible only starting from the second half of 2020. Thus, global zinc consumption in 2020 will be contracted by at least 2.6% to 13.3 Mt.
*Kazzinc production indicators are given in accordance with Glencore’s ownership ratio. According to the data for Q1 2020, total zinc production at Kazzinc amounted to 75 kt (+0.7% compared with the same period in 2019).
Key Russian Market Indicators
According to the Federal State Statistics Service, metallurgical production index in Q1 2020 rose by 0.7% compared with Q1 2019. During the period under review, zinc output increased by 9.8%.
Russia’s share in global zinc production (including zinc-aluminum alloys) stood at 1.6%.
According to the data for Q1 2020, Russian zinc production went up by 9% to 55 kt compared with the same period in 2019.
During the period under review, zinc imports shrunk by 63% to 5.1 kt. The bulk of zinc is imported from Kazakhstan (75%) and Uzbekistan (21%). During the period under review, zinc supplies from Kazakhstan and Uzbekistan slipped by 63% to 3.8 kt and by 34% to 1.1 kt, correspondingly. Such a significant fall in imports is attributed to a contraction of zinc supplies to the Novolipetsk Steel (NLMK) from Kazakhstan. Since free zinc volumes have become available at Chelyabinsk Zinc Plant due to industrial growth, NLMK got the opportunity to terminate most of their import purchasing. Furthermore, the imposition of restrictions on crossing the border with Russia by the Kazakhstan Government in March 2020 due to the threat of the spread of COVID-19 also contributed to this decline.
Zinc exports moved 11% upward and amounted to 5.1 kt. Most deliveries were made to Spain (97% of the total exports) and Belarus (2%).
Apparent zinc consumption in Q1 2020 tumbled by 8% and totalled up 55.3 kt. The share of imported zinc in the consumption structure slumped from 23% to 9%.
Apparent consumption decline can be attributed to the fall in zinc consumption by companies engaged in hot-dip galvanizing of metalwork and other products. According to the Federal State Statistics Service, in Q1 2020, production volumes contracted in certain segments (including galvanized products), for instance, by 2.6% in the “ferrous metals structures and its parts” group and by 0.5% in the “Wire cloth, screens, meshes and fences made of copper wire or ferrous metals wire” group. A sharp decline in production by 11.6% was recorded in the "motor vehicles, trailers and semitrailers" group.
Demand was somewhat backed up by metallurgical enterprises manufacturing galvanized flat-rolled products. In Q1 2020, the sales of these products climbed by 4% to 746 kt. Metallurgists note a rise in sales due to restrictions placed by the EAEU since 1 January 2020 on imports of galvanized flat-rolled products from the Ukraine and China.
Looking ahead, there are several risks for zinc demand in Russia, associated with the containment measures taken to tackle the spread of the coronavirus. In Q2 2020, we expect a decline in production activity from main zinc consuming industries, which will ultimately have a negative impact on metal consumption within the country.