Last year, zinc prices increased almost 30 percent on the back of supply concerns, declining warehouse stocks and a positive Chinese demand outlook.
In 2018, the base metal kicked off the year at a decade high, with LME zinc closing at $3,389.50 per tonne on Wednesday (January 24). Prices are up almost 5 percent year-to-date, and many experts believe they will continue to perform well in the coming months.
Most recently, analysts at Wood Mackenzie released a report on five key factors to watch in the zinc market this year. Read on to learn what they had to say. 1. China’s environmental crackdown
In 2017, China imposed tough environmental regulations to fight pollution, causing mines and smelters to shut down. Supply concerns impacted prices, and many believe that could happen again in 2018.
“The Chinese authorities are expected to maintain their strict stance on the environment in 2018,” the Wood Mackenzie analysts say in the report, as the majority of suspended mines have yet to meet the government’s environmental standards. 2. Production restarts and new mine supply
According to Wood Mackenzie, zinc mine supply is forecast to grow by 664,000 tonnes this year, following an estimated increase of 785,000 tonnes in 2017.
“However, the extremely strong growth in mine supply in 2017 and 2018 is insufficient to replenish global stocks of concentrate which are forecast to remain at critically low levels,” the analysts say.
3. Smelter utilization rates
Another key factor to watch this year will be whether smelters in China can increase utilization rates to meet the steady growth in zinc demand.
4. Thrifting and substitution
As constraints on smelter production limit growth in the supply of refined zinc to the market, the analysts believe demand will draw down inventories of existing metal. That decline will provide support for further price rises and an escalation of spot premiums.
But higher prices could pose a risk for zinc consumption. In fact, the increase in zinc prices is likely to encourage consumers to investigate the potential for reducing or even eliminating the consumption of zinc, the analysts explain.
“While thrifting and substitution represent a significant downside risk to zinc demand, this risk is a long-term one and unlikely to have sufficient impact to rebalance the refined market in 2018,” they note. 5. Refined zinc stocks
With all the factors mentioned above in mind, Wood Mackenzie is certain that the zinc concentrate market has tightened. But the question remains as to when will this result in stocks of refined zinc falling to critical levels and impacting prices.
“The assumption is that developments in metal stocks and price will be coincidental with refined metal stocks falling below the critically low-level equivalent to 40 days of global consumption at the end of Q2,” the analysts say. As a result, they expect prices to climb to $4,000 in the third quarter and $4,100 during the first three months of 2019.
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