Duncan Hobbs told the International Zinc Association (IZA) conference in Carlsbad, in the US state of California, that there were very different trends in world zinc mine output in the mid-2000s versus the last two years, although price activity was similar.
“The key change in the market is [that it] looks highly likely zinc mine output will accelerate at ahead of the rate of growth of demand and tip the balance into surplus,” he added.
But China as well as the broader macro environment remain a wild card, he said.
“There are risks - on the supply side, China’s zinc mine output added only a modest amount to output versus a very strong price incentive in 2017. Forecasts suggest Chinese zinc mine output could increase significantly more,” he noted.
At the same time inflationary worries, albeit absent much evidence as yet, are rising, central bank policies are changing and the outcome is uncertain, Hobbs told delegates.
“The impacts on asset allocation and prices in these uncharted waters is highly uncertain,” he added, noting that London Metal Exchange metal prices have tended to trade in tandem with inflation expectations and yields in recent years.
According to Hobbs, a new narrative - of a looming shortfall in mine output - emerged for zinc after the global financial crisis. Yet ageing mines lived on and world output exceeded expectations, he said, referring to the Brunswick, Century and Lisheen mines, while demand disappointed.
Zinc prices traded an established range before breaking down in late 2015, which was the catalyst for the voluntary production cuts announced by Glencore in that year which had previously not been anticipated.
The zinc metal market tipped into a deficit while visible reported stocks fell sharply, which was an important optical signal for the market and implied strong growth in the world economy was driving demand. There has nonetheless been something of a buffer from off-warrant stocks, Hobbs said.
On the demand side, zinc consumption reached new records last year as industrial output accelerated to its fastest increase for years in a synchronized recovery.
“The latest data points firmly to strong industrial production growth and buoyant metals demand continuing into 2018, and remaining solid for the first half of the year at least,” Hobbs said.
“The world has entered into an upgrade cycle [for growth forecasts], with positive implications for market sentiment,” he added.
Zinc price rallies outperformed the broader metals market in both the mid-2000s and from late 2015, but to a lesser extent in the latter period.
“Spreads have tightened recently, but backwardations are not as tight as seen in the mid-2000s, at least not yet,” he noted. “Spot premiums for physical metal more than doubled in the mid-2000s; the last two years have seen only a small uptick at best,” he said, noting there appears to not be a desperate scramble for metal.
But there is more of a scramble for concentrates currently, he added, with treatment charges (TCs) having fallen to lower levels for a longer time since late 2015 than seen in the mid-2000s. However, he noted that when the TCs market turns, levels can swing rapidly higher.
World zinc mine output is expected to accelerate well ahead of demand for the second half of this year, tipping the balance in the market, an executive at physical merchant Concord Resources said.