Zinc Supply Cuts Outstripped By Demand Destruction from Coronavirus

Collapsing demand for zinc caused by the novel coronavirus will swamp supply cuts from major producers Peru and India this year and leave the market with a massive surplus that will weigh on prices of the material used to galvanise steel.

The coronavirus, which has infected nearly 2 million people globally, has roiled global markets and hit demand from zinc-intensive industries such as construction and transport.

This has pushed benchmark zinc prices down about 18% this year to around $1,920 per tonne.

“With zinc you have a big demand problem and unless you see far more cuts in supply we are still expecting a healthy surplus this year,” said Colin Hamilton, analyst at BMO Capital Markets.

Hamilton said zinc was currently at levels that would likely force more supply out of the market.

Graphic – Zinc price

BMO estimates global zinc demand will fall by about 6% this year compared to a roughly flat year in 2019. This assumes a recovery in the global economy in the second half of the year, Hamilton said.

It forecasts a 335,000-tonne surplus in the 14-million-tonne zinc market this year, up from a previous estimate of 150,000 tonnes.

Governments around the world have imposed lockdowns and closed non-essential businesses such as mining to slow the spread of the coronavirus.

Peru and Mexico, which together account for 16% of global zinc mine supply, have seen mines including BHP and Teck Resource’s Antamina and Newmont-Goldcorp’s Penasquito mines temporarily close.

Nexa Resources also shuttered three zinc mines in Peru, while Sumitomo’s San Cristobal in Bolivia is closed.

Hindustan Zinc’s operations in India, which produces about a million tonnes a year, are ramping up operations after shuttering for a few weeks, a company spokesman said.

Tighter mine supply has pushed spot treatment charges, which are paid by miners to smelters to turn ore into metal, in China to a one-year low of $255 a tonne from levels near $300 a tonne earlier this year.

A shortage of concentrates from local Chinese mines is also putting pressure on smelter margins, raising the chances of output cuts, said CRU senior base metals analyst Paul Wiggers De Vries.

Graphic – Zinc treatment charges

Tumbling zinc prices have put miners’ margins under pressure.

Citi estimates that about 25% of zinc miners are loss-making at current prices and expect about 800,000 tonnes is at risk of closure from the second half of this year.

“At these levels, either you are going to see a big player make proactive cuts to supply because of margins or you are going to see smaller miners forced out,” said Citi analyst Oliver Nugent.

Graphic – Zinc market seen heading for surplus this year

Reuters Graphic

On-exchange inventories point to a well-supplied market, with stocks in China surging in middle of March to over 169,000 tonnes before easing to about 158,000 tonnes last week.

“So far, hopes for zinc are pinned on infrastructure investment, but demand growth will still be outpaced by supply this year, leading to a market in surplus,” said ING analyst Wenyu Yao.

Spread the love

Neal Bhai has been involved in the Bullion and Metals markets since 1998 – he has experience in many areas of the market from researching to trading and has worked in Delhi, India. Mobile No. - 9899900589 and 9582247600

Leave a Comment