LME WEEK 2019: Zinc fundamentals and forecast

The long-expected supply response in the zinc sector is well under way and continues to gather pace.

An estimated 1.24 million tonnes per year of mine capacity came onstream in 2018-19; this process will accelerate in 2020.

Projects such as Gamsberg in South Africa and Century in Australia are due to ramp up to full capacity and will be boosted by additional capacity. Glencore’s Zhairem mine in Kazakhstan is due to start operations. Mining is set to resume at Penoles’ Capela mine (formerly the Rey Del Plata mine) in Mexico, which closed in 2001.

And expansions at Lundin’s Neves Corvo mine in Portugal and Southern Copper’s Buenavista mine on the US-Mexico border will provide an additional 160,000 tpy.

But strict environmental controls in China and disruptions at smelters elsewhere have prevented any rise in output of refined metal. This has delayed a rebalancing of the fundamentals of the refined zinc market, which will remain structurally tight for the rest of 2019, making it another consecutive year of structural deficit and putting additional pressure on low metal stocks.

Still, following summer maintenance work, the bottleneck in the supply chain that was evident in the first half of 2019 has started to loosen. As a result, we believe that the refined zinc market will be essentially balanced in 2020 before returning to surplus in 2021.

At the same time, the outlook for zinc demand appears increasingly gloomy. While stimulus measures will support infrastructure-related consumption in China, demand from the automotive sector faces significant headwinds. Light-vehicle sales globally are set for their first annual contraction in a decade – since the height of the financial crisis.

Even construction activity, which until recently had been robust, appears to be slowing. Falling prices and margins among steelmakers are increasing the downside risks for demand in the year ahead.

We forecast a base-case for the London Metal Exchange cash zinc price of $2,381 per tonne in 2020; this would be a fall of 7.1% from an average of $2,564 per tonne that we currently forecast for 2019.

LME zinc cash price, $/t

2019 forecast average price  $2,564
2020 forecast average price
$2,381

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