LME zinc prices have underperformed relative to the rest of the base metals complex in 2021. This is partly the result of zinc outperforming in 2020, but it also reflects the expectation of significant mine capacity additions that were set to keep the refined market oversupplied.
While mine production has rebounded strongly from year-ago volumes, delays to key projects such as Glencore’s Zhairem mine in Kazakhstan and Lundin’s Neves Corvo expansion in Portugal have kept output below pre-pandemic levels. But these, and other capacity additions in Canada, Brazil and Mexico, will provide additional supplies in the year ahead.
How quickly the increasing concentrate supply translates into greater metal availability in the refined market will be the key for 2022. For the moment, we prefer to err towards a cautious view because freight capacity bottlenecks are likely to persist well into next year and China looks set to maintain its focus on reducing carbon emissions and managing energy consumption - factors that will cap zinc production growth.
Conversely, the outlook for zinc demand appears upbeat.
While central banks globally are in the process of dialing back their pandemic stimulus packages, we expect policy to generally remain accommodating. Vast fiscal spending on infrastructure will feed through to the zinc market. And while zinc demand often correlates with traditional infrastructure expansions in road and rail, zinc will also play a strategic role in new-energy infrastructure.
We also expect some pent-up demand from the automotive sector next year, after the semiconductor shortage forced automakers to defer and delay production this year.
We believe the fundamental supply-demand outlook for the global refined zinc market is more constructive now than it appeared to be at the start of the year. We are modeling a modest 137,000-tonne deficit in 2022. This would put further pressure on global zinc stocks which, at around 1.4 million tonnes, were already at a 12-year low as of September 2021.
Persistent forward selling above $3,000 per tonne has been acting as a barrier to higher prices, but we believe prices will gradually strengthen, particularly if investors start to anticipate end-of-life mine closures scheduled for 2022-2023, which will tighten refined metal availability in the coming years.
View the zinc prices in this article
What buyers are saying
- Steady demand, production still to reach pre-pandemic levels and supply chain disruptions - global freight issues, for example - have supported higher spot premiums so far in the second half of the year.
- Nevertheless, high London Metal Exchange zinc prices, which have stayed close to $3,000 per tonne since May 2021, should encourage producers to increase their output and the ramp-up of 2022 projects, thereby easing spot supply tightness next year.
- Negotiations have started earlier and some contracts were even concluded in September, with buyers hoping to avoid further increases later in the year.
- Given the high energy costs in Europe since August and high premiums, some consumers there might decrease their volumes in long-term contracts.
What sellers are saying
- While the zinc market started 2021 with mostly balanced fundamentals, as the year progressed, a number of bottlenecks hampered zinc supply - namely, the spread of new variants of Covid-19, a strained global shipping industry, challenging weather in North America and producers in Europe running at capacity since summer.
- Premiums in Europe have almost doubled since the start of the year, nearing $200 per tonne on an fca Antwerp basis, while in the United States, they are at their highest since Fastmarkets starting tracking the market - north of 10.50 cents per lb.
- Some supply-related issues, particularly those linked to climate change and logistics, are expected to continue well into 2022, which will mean a rise in contract terms.