Commodities researchers from major banks surveyed by Fastmarkets differed by $500 per tonne on their second-half 2019 forecast - that is 23.7% of the galvanizing metal's current value.

At $2,460 per tonne at the open on Friday July 19, the LME three-month zinc contract was just $10 down from where it started the year, having hit a 10 month high of $2,958 per tonne on April 1.

Zinc's price volatility stems from its shifting fundamentals and the physical bottlenecks staggering the market's move from acute deficit to expected future oversupply.

And with analysts pointing at different physical market metrics as indicators of future price, questions remain as to whether the balance will appear this year or next.

Stocks on the slide
"I don't share the opinion of other market observers that there is enough supply to meet demand," Commerzbank's Daniel Briesmann said on Friday.

Commerzbank forecasts a three-month price of $2,800 per tonne at the end of 2019.

"I don't see production coming back onto the market at current levels so I think we will see a supply deficit which has already been recorded for the first months of the year," Briesmann said.

Data compiled by the International Lead & Zinc Study Group (ILZSG) this week showed a refined zinc metal deficit of 123,000 tonnes from January to May 2019.

This has been supported by a drawdown in visible stocks of the metal; total zinc stocks across the London, Shanghai and Chicago commodity exchanges are down 12.4% to 157,816 from 180,202 tonnes across July.

This, Briesmann says, is reflective of the lack of increased refined output coming to the market despite higher production of mined metal.

"I don't think that better availability of zinc concentrate will feed through to the refined market, at least not in the time being,” he added.

Treatment charges at 4-year highs
Major new mines including Vedanta's Gamsberg and MMG's Dugald River ramped up to full production toward the end of 2018, while Glencore is continuing to bring back its Lady Loretta mine after it was suspended due to low prices in 2015.

Higher mine output has resulted in a 2.6% or 123,000 tonne uptick in refined production, according to ILZSG stats.

With Chinese smelters as key swing producers, increased mine output is likely to accelerate smelter production, according to Bank of China International head of commodity markets strategy Xiao Fu, who forecasts the zinc price to average $2,400 per tonne for the second half of this year and $2,300 per tonne in 2020.

"There are still some smaller smelters subject to environmental checks, but with zinc ore supply being plentiful and the [treatment charges] being sufficiently high to incentivize production, we think refined zinc output will recover," she said.

Treatment charges are discounts to the exchange price paid to smelters for the costs of turning concentrates into refined metal.

At $275 per tonne, Fastmarkets’ zinc spot concentrate TC, cif China, in June is nine times higher than the $30 per tonne assessed last June, marking a considerable boon for smelter revenues.





Macro headwinds vs weaker dollar
Intessa Sanpaolo economist Daniela Corsini, who forecasts the price to average $2,500 per tonne up to the fourth quarter of 2020, remains conscious of potential escalations in the trade war between the United States and China.

Among industrial commodities, zinc is particularly exposed to factors that affect China, which is both the world's largest miner, smelter and consumer of the metal.

On Monday, China reported that its gross domestic product grew by 6.2% in the second quarter of the year, the slowest growth since 1992.

"The key risks weighing on the sector are related to macroeconomic and political factors, which could prevail over the good fundamentals," Corsini said, adding that expectations of higher supply are already priced into the market.

However, while macro worries continue to place a shadow over commodity prices, a potential devaluation of the dollar could provide a boost to base metals including zinc, BOCI's Fu noted.

The US Federal Reserve is signaling cuts to interest rates in line with the current Trump administration's preference for a weaker dollar to encourage exports.

"You can argue that with the trade dispute and global synchronized slowdown, the demand aspect won't be very rosy. But at the same time, the competitive devaluation of currencies around the world means commodities will still be seen a store of value to some extent, that's why I'm not expecting a huge drop in prices," she said.

Demand linked to troubled auto industry
Another factor that remains at play is the demand side; heavily tied to the galvanizing of auto parts and chassis, zinc demand is likely to have been affected by a difficult year for the automotive industry.

Predictions for Chinese automotive demand is down 14.2%, according to the country's National Bureau of Statistics. Meanwhile, German passenger car production in January-June is down 12% against the same period in 2018, according to the country's automobile association, VDA.

Fastmarkets’ zinc SHG min 99.995% ingot premium, dp fca Antwerp, is at $90-110 per tonne as of July 16, down from $115-125 per tonne at the start of the year.




"Demand is very weak," Citi metals strategist Oliver Nugent told Fastmarkets. Citi has set a zinc price expectation of $2,300 per tonne for the fourth quarter and as its 6-12 month forecast.

Analysts clearly hold a view for lower zinc prices, with a sense that higher smelter production is a case of when rather than if.

But given the performance of the past six months, and with so many factors at play, the metal’s price instability may not yet be at its end.