‘Slight wrinkles’ on physical market to stay zinc’s rise above $3 000/t to H2 2017

3rd March 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

Font size: - +

VANCOUVER (miningweekly.com) – Despite zinc outperforming other base metals in 2016, “slight wrinkles” in the otherwise strong fundamentals for the metal will delay its price ascent beyond the $3 000/t mark before midyear, new analysis by Bank of America Merrill Lynch (BofAML) Global Research shows.

Analysts note that activity on China's zinc market has not picked up following the Lunar New Year, compounded by a soft start to the year for the industrialising country’s refined zinc imports.

“While activity in some sectors, including housing and automotive, has been slowing, we note that China's infrastructure investment has been holding up, which should ultimately help in taking zinc prices above $3 000/t ($1.36/lb) towards mid-year,” the Global Research team reported on Thursday.

Fundamentals for the oxidation-deterring metal are supporting the rising price. Rising global galvanised steel output, which rose 5.7% in the fourth quarter, is underpinning steady demand growth, especially from the steel industry. BofAML estimated that global galvanised steel production was up by 2.8% year-on-year in 2016, an expansion that should carry over into this year.

Analysts believe zinc’s price rally is fundamentally justified, with reported inventories continuing to fall. However, the Global Research team notes that market participants sceptical of zinc's rally often point towards the lack of premia increases. “This, we believe, is unfair, partially because premia were elevated and distorted after the [crackdown] on lengthy queues at London Metals Exchange warehouses. As these queues normalised, premia declined. Long-term relationships between premia and prices suggest no valuation differences between physical and paper markets at present,” the team advised.

Digging a bit deeper, the zinc rally was heavily influenced by Glencore's decision to shutter 500 000 t of mine supply in 2015. Other permanent and temporary closures helped too, with China's mine production, for instance, declining in 2016.

Influenced by this dynamic, the availability of mine supply has tightened meaningfully and spot treatment charges fell by 86% since mid-2015 to just $30/t; this should also feed through into annual contracts that are currently negotiated, the bank said.

While rising zinc prices have offset some of the declines in term contracts, the operating environment for smelters remains challenging, a point also made by BofAML’s ‘pain-and-gain’ matrix. “Having said that, there is scope for a rebound in mine supply growth. While we remain bullish, this suggests that the magnitude of the zinc price rally this year may be somewhat smaller than in 2016,” researchers said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION