TORONTO (miningweekly.com) – This calendar year is expected to tell a tale of two outcomes for zinc as tight first-half concentrates and declining metal stocks contrast against new supply coming on stream and building concentrate levels.
CRU Group analyst Ryan Cochrane foresees the real cash price of zinc building towards a crescendo this year, approaching $4 000/t, before falling back sharply at first, and then gradually back to below the $2 500/t-level by 2022. Significant zinc concentrate surpluses of more than two-million tonnes will emerge from then onwards, as the smelter capacity response is much slower than the forecast growth rate.
"The first six months of the year are expected to remain in a sizeable deficit as a tight concentrate market constrains smelter utilisation. Over the medium term, zinc will see supply outpace growth in smelter capacity, supporting a lagging rebound in treatment charges and smelter investment," he recently told an audience in Toronto.
The leading indicator for the turn in the zinc market may be spot treatment charges, he says, signalling the end of the price run and the zinc price cycle turning.
Zinc demand is expected to grow by just under 2% this year and to slow into 2019, as the Chinese demand growth rate decelerates by 2.1% this year, and 1.8% in 2019.
Cochrane says the zinc market has a history of price spikes, and miners have progressively carved out a larger share of zinc revenues, compared with smelters. Cochrane's data shows that the average price spike lasted about 2.5 years, but had been getting longer in recent periods. Meanwhile, miners are earning more for their products and smelters' share of zinc revenues are expected to be at a historic lows of 23% in 2018, compared with the average revenue share of 43%.
Cochrane said the most recent zinc price bull market was driven by sharp reductions in concentrate and metal stocks, noting that there has been a difference between concentrate and metal price drivers.
From 2015, Glencore closed several major mines that had reached the end of their lives, helping drive an acute decline in both concentrate and metal market surpluses.
According to Cochrane, prices breaching the ninetieth percentile has been a key bullish indicator in the zinc market over the past three decades. "For zinc, one has to get quite deep into the cost curve before discipline emerges, and this is what happened in 2015."
Depletions and idled capacity drove record deficits in zinc concentrate markets between 2015 and 2017 and have put downward pressure on treatment charges.
"Spot premia has remained tight, with no real movement in contract prices," he noted.
While the zinc price rallied from $1 500/t to more than $4 600/t, Chinese miners have benefitted from the supply shortage, seeing even marginal producers raking in fat profits in the current environment. However, Cochrane cautioned that the biggest mine supply uncertainty currently rests with China, as systematic over reporting has been replaced with a net bias towards underreporting in the fourth quarter of 2017.
Despite the surging margins, Chinese mine supply has yet to respond sharply and the next test for the concentrate market will come during the first half of this year. He notes that there is potential for about 400 000 t/y of new capacity to come on line through a combination of new mines and expansions. Between 2017 and 2022, additional zinc capacity from China could account for more than one-million tonnes a year of new production, which will be led by the 200 000 t/y Huoshaoyun development.
Meanwhile, the next generation of zinc mines are set to shift the market. Between 2017 and 2022, zinc mine closures and production contractions will cost the industry about 1.15-million tonnes of production, with new mines and redeveloped projects expected to contribute about 1.5-million tonnes of zinc.
Ultimately, the zinc market is expected to see the addition of more than 2.5-million tonnes of zinc production between 2017 and 2021, spelling the end of the price run for the industrial metal during this cycle.
Global zinc demand totalled 14-million tonnes in 2017, and despite slowing rates of growth in China, the bulk of absolute consumption increases are still expected to come from China. Between 2017 and 2022, zinc demand is expected to rise by 1.3-million tonnes.
Cochrane pointed out that there's a disconnect between smelting capacity and concentrate production at the moment, leading to growing concentrate inventory, which he expects could become quite significant.
"One will need to take a countercyclical view to invest in smelters right now. Utilisation will pick up, however, and 2019/20 will see high utilisation rates," he noted, adding that demand is roughly growing with smelting capacity.
"Mine supply is expected to outpace smelting capacity growth over the medium term, resulting in a build-up of concentrate, rising smelter utilisation and rising treatment charges," he said, which will ultimately incentivise new smelting investment.
Asian economies are believed to continue to drive zinc consumption growth but CRU expects high prices to constrain demand in 2018 and 2019.
Cochrane sees prices falling towards the ninetieth percentile of the cost curve by 2022, capping the highest average margin period for zinc miners in three decades.
However, investors are hard-pressed to find pure-play exposure to the fortunes of the zinc market, with the top 15 miners having on average less than 20% exposure to zinc revenues. Only three miners – Volcan, Trevali and Nevsun – have zinc exposure greater than 50%.
The upside is that high metal prices are expected to sustain robust margins for zinc and lead miners for the foreseeable future.
The three-month-London Metals Exchange contract price was $3 257/t on Wednesday.