Zinc didn’t have such a great 2018, with prices crashing through the year as the US-China trade war chewed into commodities, though analysts said that the metal’s fundamentals remain solid.
Despite the background noise, many analysts said last year’s fall in value was partially a correction due to overpriced values earlier in 2018.
At the beginning of 2019, zinc was trading at US$2,460 on the London Metal Exchange — not far above its 2018 low of US$2,285 — though since then it has risen by 18 percent, with two days so far spent above the US$3,000 mark.
An interesting story in 2018 was the dramatic and sustained fall in zinc metal stockpiles around the world — a trend that continued well into 2019 with concerns of a supply crunch on the way — though that may soon change.
Speaking with the Investing News Network (INN), Senior Analyst at CRU Group Helen O’Cleary said that LME stockpiles were up off lows hit recently, which there was between 51,000 and 52,000 tonnes of the metal in warehouses.
For reference, combined zinc stockpiles around the world were at about half a week of global supply.
O’Cleary said that at CRU, they believed that “there was a concerted effort to reduce LME stocks to exacerbate the appearance of refined market tightness.”
She added that given that demand growth was lacklustre, and market participants seeking the metal weren’t reporting any shortfalls in supply, “the sharp fall in LME stocks is partly technical.”
A recovery in stockpiles could be slow according to O’Cleary, who said that while ongoing demand weakness meant they would recover — smelter capacity would throttle any increases to stockpiles.
“Demand weakness in China and in much of the world ex-China suggest that the smelter bottleneck will be on the concentrate side (not enough smelter capacity to treat rapidly increasing concentrate supplies) rather than on the demand side.”
Stefan Ioannou of Cormark Securities told INN that zinc supplies had been in a ‘critical’ and therefore volatile area for many years now, which he defined as below 300,000 tonnes.
“They’ve been below that since the middle of 2017,” said Ioannou.
Talking about the movement of the zinc price, he said that while its value did increase in 2017 as stockpiles fell, the trade war muddied the commodity waters and base metals suffered — most of all zinc.
“With the trade war-induced drama we saw zinc prices, as well as most commodity prices, pull back through most of last year.”
He went on to say that with inventories well down into 2019, prices would remain up as markets started to think more about supply.
On that front however, he added that the zinc market was split into two areas: zinc concentrate, which is the mine supply, and zinc metal, which is refined.
All zinc concentrate becomes zinc metal, and while metal supplies are down, concentrate supplies are up — and it’s because of a bottleneck in smelting capacity and a raft of new zinc projects coming online.
That means that while there’s plenty of zinc concentrate in the supply chain, there weren’t enough smelters working to turn it into metal.
“The argument is that miners are going to have a tough time here going forward because there’s actually an oversupply of concentrate and not enough smelting capacity out there to use it all. They’re going to be fighting to the nail amongst one another to sell their products. To be fair, we’ve seen that,” said Ioannou.
“We just saw the new benchmark TCs (treatment charges for smelting) come out for 2019. No huge surprise there. They’re up significantly over the last year. The new benchmark is US$245 a ton. That’s up from US$147 a ton last year which was historically quite low.”
He added however, that normally TCs are around the US$200 range, so US$245 “is not astronomical in the grand scheme of things. Nevertheless, coming off US$147 last year, it’s eye-opening for sure.”
Ioannou explained that a shortage in zinc metal would drive the metal price higher, and a surplus of zinc concentrate would drive TCs higher.
“At the end of the day, I would say most zinc equity will benefit more from a rising zinc price than they will be punished by a corresponding rise in treatment charges.”
Price forecast
Ioannou said that at Cormark analysts forecast the zinc price to average US$1.35 per pound through 2019, with an average so far of US$1.24.
He said that US$1.50 per pound zinc was “very foreseeable” sometime in 2019 given zinc metal supply.
O’Cleary at CRU was not as optimistic about the zinc price.
“Prices have increased further than we were expecting and we still hold the view that there is considerable downside price potential in H2,” said O’Cleary, whose remarks reiterated comments she made to INN at the beginning of the year, where she forecast an uptick in prices in Q1, followed by falling prices through the rest of the year. - Source: Investing News-