Overview of Zinc

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Zinc continues to enjoy the strongest fundamental support within the metals complex and prices currently stand at more than ten-year highs, with rock-bottom refinery treatment charges of $19/t as of March 2018 indicating continued and acute concentrate shortages (chart 5). The zinc market’s tightness stems from a lack of new mines and the largest-ever annual reduction of global production capacity in 2016, which saw the closure of the large Century and Lisheen mines as well as the idling of much of Glencore’s global zinc mines due to the weak price environment. This mine crunch sparked off the bull market that zinc current finds itself in: 1) fewer mines meant less concentrate for the market to refine into metal; 2) acute concentrate deficits depressed treatment charges as smelters fought for feedstock; 3) smelters were eventually forced to cut back metal production for lack of raw material, which 5) transmitted the concentrate shortage to the refined market; 6) metal shortages prompted price spikes, which are 7) incentivizing new mines onto the market and will eventually 8) tamp down the high prices currently enjoyed by zinc miners (chart 6). We forecast zinc prices to average $1.60/lb in 2018–19, up from less than $0.70/lb in early-2016, before gradually falling back toward zinc’s long-term incentive price of around $1.00/lb.

We expect the current high price environment to prompt significant new zinc mine supply growth over the next half-decade, with major mines scheduled to open in each of the next few years. One thing that makes this zinc rally different than previous experience is the role of China, still the world’s largest producer. In previous high-price episodes, Chinese mines were seen to be relatively elastic and able to ramp up output quickly to meet spot supply concerns. However, Beijing’s ongoing environmental policy push has complicated this reaction as new rules make it more difficult for small-scale mines to operate. Indeed, the market share of small Chinese zinc mines (<10 ktpa) fell from 50% in 2015 to the low-40s in 2017 as larger, more efficient but less flexible operations displaced smaller mines that would typically adjust production to capture these higher prices. Given China’s flexibility challenges, new zinc mine supply in this cycle is expected to be sourced primarily from non-Chinese jurisdictions, including Australia as well as many of Glencore’s previously idled zinc mines around the world. Zinc concentrate tightness is expected to ease in the latter half of 2018, which will be confirmed by rising benchmark treatment charges. This new wave of concentrate supply is expected to strain the capacity of the global zinc smelter fleet, which is currently operating at around 85% of capacity; utilization will need to rise to nearer 95% in order to absorb anticipated concentrate supply growth. This points to the likely next step in the zinc market’s rebalancing: the potential for a bottleneck in the zinc smelter sector following years of low treatment charges, which could prompt a second mini-rally in the early 2020s if additional smelter construction is delayed.

Source: Scotiabank Commodity Price Index, May 10, 2018

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A Zinc Market Outlook by Frik Els, MINING.com

Zinc is the best performing base metal so far this year and measured from its six-year low struck mid-January today's $2,280 a tonne zinc prize is up 55%.

Zinc's prospects brightened considerably after the shutdown of two major mines last year – Australia's Century and the Lisheen mine in Ireland. The two mines had a combined output of more than 630,000. The shuttering of top zinc producer Glencore’s depleted Brunswick and Perseverance mines in Canada in 2012 brings total tonnes going offline since 2013 to more than one million tonnes.

While the pace of gains in 2016 is unsustainable, zinc prices are expected to rise steadily over the long term.

Glencore has been out in front when it comes to curtailing production to shore up prices and the Swiss giants' announcement of cutbacks inspired another leg up in the price. Glencore's first half production numbers showed a 31% output decline to 506,000 tonnes after the company idled mines in Peru and downscaled its Australia operations. Nyrstar's zinc mine output fell 39% over the same period and the Swiss company has cut capex by nearly two-thirds as it seeks to exit mining.

China is now forecast to have a mined zinc deficit of 390,000 tonnes in 2016, widening from a deficit of 9,000 tonnes a year ago.

China, top consumer and producer of the metal mainly used to galvanize steel, recently added fuel to the fire after Beijing ordered the shutdown of all lead and zinc mines in parts of Hunan province, the centre of Chinese production.

A new report by BMI Research says that while the pace of gains in 2016 is unsustainable, zinc prices are expected to rise steadily over the long term, averaging $2,000 a tonne in 2016 and $2,350 a tonne by 2020.

BMI's forecast represents an annual average gain of 3.9% to 2020, following an average annual contraction of 2% over the previous five-year period.

The better price environment is due to structurally weaker supply that will keep the global market in a deficit.

Shortage is most acute at mine level with ore and concentrate production forecast to drop by 6.8% year on year in 2016, according to the report. Total global refined output will shrink by just under 1% this year and return to tepid growth of less than 2% through 2020, outpaced by demand growth.

Sustained deficits will translate into a very tight-above ground stocks-to-use ratio according to BMI, with inventories representing less than 5% of consumption by the end of the decade compare to more than 11% this year.