Zinc Market. Production, Consumption and Price of Zinc

The zinc market is characterized by brief periods of high price that occur about once per decade. Although the market now seems to be steadier than at times in the past, the annual averages mask large daily fluctuations. For example the cash zinc price rose in 1997 by 68 percent--from $1,035 a tonne at the beginning of 1997 to a year's high of $1,740 a tonne, before subsiding again. Prices of zinc, along with those of most commodities, are of course controlled by supply-demand balances with speculative activity able to create short-term perturbations. The price rise in 1997 was due to great confidence that zinc was heading for a shortage. A disastrous speculation by a Chinese smelter then allowed a holder of physical zinc to "squeeze" the market, forcing the price for spot delivery way above its fundamentally justified level. The Chinese smelters who were instrumental in the large increase were then effective in ameliorating the position as they ramped up production and exports to cover the shortness. We do n ot believe that such a rapid price rise is likely to be repeated in the near future. The Chinese will be at least one group that will be very wary of making such a mistake again. In addition the stock level, whose fall seemed as if it was going to produce the extreme shortage of metal, has now stabilized, largely due to the continuing high level of Chinese exports.

Where then is the price heading and what are the major factors in the market today? This article will track the major trends in the market to the present day, indicating where the next move might be.

Metal demand remains strong

Demand for zinc has been strong in recent years. During the 1980s, zinc demand grew more slowly than general industrial production as substitution and economies in use made inroads. In this period, we saw zinc demand growing at an average of 1.65 percent per year while general levels of industrial production grew much more quickly; in economists' terms, the intensity of use of zinc was falling.

By the 1990s, we were seeing two effects that reversed this decline. Firstly, only 100 years after development of the automobile, its manufacturers started to widely apply an only slightly older technology--galvanizing. Secondly, most galvanized sheet is used in construction, and the Asian construction boom led to further strong demand.

As a result, the fall in the intensity of use reversed, but following the Asian "crisis" of 1997 the decline resumed. We expect this fall to continue for two reasons. Firstly, the use of galvanizing in automobiles is reaching saturation, so further growth in zinc for this application will be limited to growth in auto production. Secondly, it is unlikely that entrepreneurs who were stung by the 1997 collapse in Asia will again invest in the high levels of speculative construction that was seen there in the early 1990s.

But generally, economic activity is strong, and zinc consumption is growing at between 2.5 and 3.5 percent per year, depending on whose forecast you take. CRU takes the more conservative view of consumption growth, which leads to a forecast of a surplus of zinc. The higher-end forecast of others gives quite the opposite conclusion--a zinc deficit growing from today and, in consequence, marked differences from CRU's price forecast.

Zinc supply will meet demand needs

Actual supply to the Western markets has been strong[y influenced by former East Bloc exports, particularly from China. For example, in 1989 Western demand of 5.244 million tonnes was entirely supplied by Western smelters, and in a balanced market 26,000 tonnes were exported to the East Bloc. In 1999, Western demand was 1.406 million tonnes higher than in 1989, but 875,000 tonnes of this was supplied from increased East Bloc exports, with Western smelters increasing their gross output by only 605,000 tonnes (stock increases make up the difference). In 1999, the Western zinc market was in approximate balance, being possibly up to 50,000 tonnes in surplus.

Output growth in China should be constrained from now as the Chinese government is taking steps to control the growth of the small, inefficient and polluting smelters that have been largely responsible for much of the recent output growth. This, and rising domestic demand, will bring Chinese domestic consumption growth into balance with output growth. If this assumption is correct, then the rise in Chinese exports will have peaked, and Western smelters will have to increase output to make up for any Western demand growth.

Western demand in 2000 is forecast to be close to 200,000 tonnes (2.6 percent) higher than in 1999. But there is approximately 250,000 tonnes of new capacity that will have come on stream in the West between last October and the middle of this year. The 170,000-tonne-a-year new smelter of Sun Metals in Townsville, Australia, was commissioned in October. Assuming that it achieves close to its capacity this year, production is likely to be some 130,000 tonnes more than 1999's 15,000 tonnes. In addition, Penoles is about to commission a 90,000-tonne-a-year expansion of its Torreon smelter, which should conservatively produce 60,000 tonnes more than last year.

These expansions alone will be enough to keep the market in small surplus, but there may, in addition, be another source of former Eastern Bloc zinc. Glencore took over the Kazakhstan smelters in 1996 and began to rehabilitate the rundown operations. As a result, output has been rising, but the metal Was not seen in the market place. The mystery has apparently been solved with 100,000 tonnes of Kazakh zinc clearing U.S. customs in the final four months of last year. Assuming that this will find its way onto the market eventually, then last year's total world surplus of zinc may well be much larger than we thought, with clear consequences for the longer term supply-demand balance.

The Kazakh zinc exports thus add extra material to a market that looked to be on the surplus side of balanced. It will be a further softening influence to the market that ended the last millennium full of confidence but has started this one looking less sure.

Consequences for concentrates

Forecasts made about five years ago indicated an impending concentrates shortage. New mines were planned to meet this perceived shortage, but when the world needs new zinc mines, too many are usually built and this time is no exception. Additionally, forecasts of mine lives tend to be underestimated, as there is almost always further proving up at existing mines that extends life. So, although new mines are needed to meet exhaustion and demand increases, the mines now being commissioned are both in excess of required capacity and coming on-stream before the mines that they are designed to replace have actually become exhausted. The result is an inevitable surplus, even for the smelter output growth that we forecast.

This concentrates surplus might not appear to have an immediate impact on the zinc market. It needs smelter capacity. But a large concentrates surplus will ensure that smelters can buy feed material at advantageous prices, and so they will have every encouragement to maximize output. History shows that concentrate surpluses do encourage smelter output and certainly coincide with falls in metal prices.


In summary, the zinc market is in modest surplus, with supply increases from Western smelters replacing those from Chinese smelters that we have seen in recent years. Kazakh zinc from its newly improved smelters is adding to Western supply, and this has not yet had a chance to impact on the market. An ample supply of concentrates seems likely to encourage even more supply of metal to the market. We have to be bearish about the short-term prospects for zinc supply.

Will patterns of the past be repeated and a price spike occur again? We certainly seem to be on the low price part of a cycle, but there are structural differences in the market compared with 10 years ago. China is now a large factor and appears willing to sell into any rally up to about $1,200 a tonne, which will effectively cap prices at this level. Kazakh exports could add to this source of supply. However, low prices now will discourage investment and will slow output growth, at least in the West. But only when the whole world is in deficit will we see prices rising above about $1,200 a tonne for a sustained period. Even if there is no further growth in former East Bloc supply, this deficit is unlikely to appear before 2004.

Source - http://www.unctad.org/

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