The most important driver of the
zinc market in 2020 will be the performance of the world’s zinc smelting
industry, research firm Wood Mackenzie said in a note on Thursday.
The easing of trade tensions between the US and
China, the struggling manufacturing sector and a build up of concentrate stocks
will also be important for the industry this year, Wood Mackenzie said.
Andrew Thomas, Wood Mackenzie Research Director, sees four key themes to watch in the global zinc market in 2020.
1. Smelter performance is critical to market outlook
With every 1% change in Chinese utilisation
equating to 77 kt of refined output, Chinese smelter utilisation rates is the
key issue facing the zinc market in 2020.
“Although ex-China smelters have been important in recent years, it is the Chinese that have the most influence on the balance of the zinc market. During 2018, environmental compliance became a problem for the sector, forcing capacity closures, cutbacks and collective output to fall. However, Chinese smelters have gradually upgraded their facilities and Chinese refined production has recovered to the point where Chinese capacity utilisation reached 85% in Q4 2019 – the highest rate since 1998,” said Thomas.
“The key question facing the zinc market in
2020 is whether Chinese smelters can sustain operating rates at these elevated
levels. Certainly, expectations are that high TCs and a ready supply of
concentrate will incentivise Chinese smelters to do so, effectively turning
surplus concentrate into surplus metal. However, the same expectations 12
months ago ultimately proved to be misplaced.
“In addition to continued scrutiny around
the disposal of solid waste, authorities are looking critically at sulphur
dioxide emissions – an unavoidable by-product at most zinc smelters. Authorities
are also considering preventing pollution at source through new standards on
imported concentrate. If these were enacted, they could reduce the availability
from China’s traditional suppliers by as much as a third.
“These environmental issues, together with limited access to credit for private sector smelters and modest Chinese demand growth, will not allow runaway growth in Chinese refined production in 2020. Therefore, we forecast that Chinese utilisation rates will lift to 83% in 2020, resulting in Chinese output growing by 5.4%, or 320 kt, in 2020,” said Thomas.
2. Mine closures imminent?
With zinc prices falling to below $2,300/t in recent months and treatment charges (TCs) ranging from $290-400/t, speculation of mine closures has surfaced.
With metal stocks at such low levels and the prospects for global growth arguably improving in the wake of the easing of US-China tensions, a retreat in the zinc price for the six months or so needed to drive a supply side correction is a low-risk event.
“With 0.4 Mt of new mine supply forecast to enter the market, global stocks of concentrate are set to become excessive in 2020. With most of the world’s smelters carrying normal levels of stock and having limited storage capacity, the storage and financing of unwanted concentrate is set to become an issue. Indeed, the last time zinc concentrate stocks were set to become excessive – between 2012 and 2014 – expectations of a tightening market in 2015 incentivised traders to buy and hold concentrate. In today’s market, there is little prospect of tightening and therefore no incentive to buy and hold concentrate. In fact, the opposite is true.
“If smelters have limited scope or need to buy and store concentrate, and traders are disincentivised to carry more than their normal working stocks, the onus is on miners to hold stocks of unsold concentrate. Unsold concentrate represents the ultimate cashflow squeeze for miners, which together with limited mine site storage capacity, is likely to result in mines that produce less desirable qualities of concentrate being forced to adjust output to match offtake – thereby leading to lower production and, in some cases, mine closures,” added Thomas.
3. The macroeconomic environment
2019 proved to be the second consecutive year of annual contraction for global zinc demand – which fell by 1.1%. International trade tensions, an effective recession in the global automotive sector and the consequent weakness in global manufacturing all contributed, Wood Mackenzie said.
In 2020, global demand is forecast to stage a modest recovery and expand by 1%. In Wood Mackenzie’s view, further economic uncertainty could easily neuter this.
“The global automotive industry is an important end-use market for zinc and is facing considerable uncertainty in 2020,” said Thomas. “Changes to environmental regulations
combined with weak economic growth resulted in sluggish sales and production in
most key markets during 2019.
“Although the impact of environmental regulations in some markets, notably China, are expected to fade, in others, such as the EU, the sector will continue to face significant challenges. This is likely to result in little or no growth in overall automotive output and see the process of relocating capacity from high-cost countries to the lower-cost countries of central and eastern Europe continue. The consequent impact of this would sit with regional demand for zinc.
“One area where uncertainty has lessened is
the US-China trade war. This month’s signing of the Phase 1 trade agreement by
both countries marks a significant de-escalation. However, with most tariffs
set to remain in place and serious reservations as to whether some of the
targets for Chinese imports of US goods are achievable, the positive impact is
likely to be modest and could prove temporary.
“Another source of uncertainty for zinc demand is the forthcoming US presidential election. In previous election years, this has often resulted in companies slowing the pace of business investment. The converse is that the pace of investment is likely to accelerate once the outcome is known,” Thomas said.
4. Sentiment has led to a disconnect between prices and stocks
In 2019, trade tensions and economic uncertainty
undermined investor sentiment towards commodities across the board.
“For zinc, this macro-economic driven sentimental impact exacerbated the perception that a substantial surplus in the refined market is about to emerge. This negative attitude has offset the fact that stocks of refined zinc, in terms of days of global consumption, are at all-time lows,” Thomas said.
“Although trade tensions have eased, much of this
has already been priced in and, therefore, zinc prices are forecast to remain
subdued despite the base case forecast that refined zinc stocks will remain at
low levels throughout 2020.
“If sentiment were to improve significantly,
possibly as interest rates are cut in key economies and international tensions
ease further, the zinc price may re-engage with its fundamentals of low metal
stocks and revisit the highs of over $3,000/t seen in 2018,” added Thomas.