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The zinc price has defied expectations that oversupply would put so much downward pressure on prices that last month’s $3,100/ton high would be the peak for years to come.
Although the zinc price has drifted off those highs, it is currently just under $2,900 per metric ton for cash and three-month on the LME, zinc prices have remained stubbornly high, despite a complete lack of investor interest.
As with aluminum and copper, the Shanghai Futures Exchange has outperformed London this year. However, even the SHFE zinc price has come off this month. Most metals have moved into a temporary sideways market.
The International Lead and Zinc Study Group estimates the zinc market recorded a supply-demand surplus of just 31,000 metric tons in January-April, compared with a surplus of 256,000 tons in the same period last year, according to a Reuters post. That also compares with an earlier April forecast for a 353,000-ton surplus this year.
Reuters puts the tighter-than-expected market down to bottlenecks in China’s processing sector. The country’s refined metal production slid by 8.2% in May relative to April due to the power curtailments in drought-hit Yunnan province.
Power production from hydroelectric schemes has been hit by a lack of rains impacting both aluminum and zinc smelting this year. Yunnan is home to some 12.5% of China’s refined zinc production. The rainy season that usually starts in the early summer is expected to alleviate water supply concerns. Reuters quotes a Macquarie Bank analysis that predicts the zinc market will drift back into balance, for both concentrates and refined metal, from late summer onwards.
Many analysts see this as the start of a prolonged decline in zinc prices stretching through the decade as mine supply increases and a slowdown in China’s steel production eases demand from the galvanizing sector.
China has been a net importer of refined metal for the last two years. However, the expectation is this will flip to the historic net export position from the middle of this decade. That would add further supply to the global market and downward pressure on prices.
In the meantime, the Chinese National Food and Strategic Reserves Administration is doing its bit. It is releasing stockpiles via auctions, the first for 30,000 tons next month. That will help increase availability and further ease support for prices in the second half of this year.
By Stuart Burns via AG Metal Miner
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