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Metal Miner

Metal Miner

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Is Zinc On The Brink Of A Breakout?

  • Bullish catalysts are mounting for zinc and other industrial metals.
  • Sky-high energy prices in Europe have forced smelters to halt operations.
  • A potential supply squeeze in zinc could send prices higher. 

If you look at zinc price trends from this past year, it’s hard to identify what you might call a “clear trend.” After building from a pandemic-driven low of just $1,960 a ton, the metal skyrocketed to over $4,500 just four months ago. Unfortunately, pride cometh before a fall. And fall zinc did. In fact, by mid-July, it had sunk below $2,700 only to bounce back to the mid $3,000s in August.

So, what exactly is the story behind the zinc price fluctuations? Moreover, is it possible to predict which direction zinc will take for the rest of the year? Unfortunately, there are no simple answers. However, there is a myriad of factors that can be analyzed, evaluated, and – to some degree – predicted. Among them are rising European energy costs, the ongoing war in Ukraine, and a little country you may have heard of called China.

Smelters Across Europe Have Cut Zinc Output

Energy prices in Europe have been surging for months now. Indeed, Bloomberg recently reported that there are already talks of rationing during the cold winter months. As most people are aware, Russia’s invasion of Ukraine and hostile reaction towards sanctions is a big culprit here. However, an inordinately hot summer and increased demand aren’t helping one bit.

Supply and demand being what they are, reduced gas from Russia has caused energy prices to skyrocket all over the continent. This has, in turn, forced multiple smelting operations to curb their overall output of energy-intensive metals. Among the first commodities on the chopping block? Aluminum and zinc. After all, both of these metals require vast amounts of electricity, and – quite frankly – many smelters simply can’t afford them anymore.

Indeed, Reuters recently indicated that energy now accounts for about 80% of the cost of both zinc and aluminum in Europe. This is double the average budgetary allotment seen in previous years. According to Glencore, the continent’s biggest zinc producer, the strain is already taking its toll on the competition. Recently, Australia’s Nyrstar cut output at their European smelters, as did Auby in France and Balen out of Belgium.

In fact, it’s estimated that smelting closures could reduce global zinc output by 150,000 tons this winter. This is on top of cuts already made back in 2021. Again, supply and demand being what they are, a zinc price rally seems all but inevitable. Or is it?

Zinc Price Problems: Supply is Dwindling, But Demand May Matter More

According to the LME, stockpiles of zinc and aluminum are already running low. In terms of the former, only about 74,000 tons remain where there were nearly a quarter million tons a year ago. To add fuel to the fire, about a third of that 74k is already set for delivery. This dwindling  supply was the leading cause of the summer zinc price resurgence. It’s also why many feel the price will continue to rise. As Geordie Wilkes, a senior analyst at Sucden says, “It’s probably only a matter of time before zinc rallies again.”

However, other experts contend that supply might not be the determining factor after all. These folks posit that a global economic slowdown will curtail demand enough to keep prices low, regardless of production woes. As one analyst from JPMorgan put it, “metals-consuming manufacturers would likely also get swept into the curbs, generating a shock to demand that would likely either fully offset or even overwhelm closures to supply.”

Related: EU In Talks With Alternative Suppliers As It Considers A Russian Oil Ban

It’s true that zinc’s primary use is to protect iron and steel from corrosion via galvanization. And if the global economy does grind to a halt, the need for galvanized steel will likely drop significantly. But while the worldwide construction industry is admittedly struggling in places, it’s still expected to grow by trillions of dollars by 2030. Even accounting for both over and underestimates, that’s still a vast market that will have a strong need for galvanized products.

So, sure, it’s possible that demand will plummet alongside prices. But even if this were to happen? How long would that last? Moreover, would the drop be able to outpace an energy crises that seems to have no end in sight?

Chinese Power Restrictions Savage Zinc Production

As the world’s second-largest economy and primary source of countless commodities, China has a lot of say when it comes to metal pricing. Unfortunately, Beijing recently imposed stringent power restrictions across the country, drastically reducing national smelting capacities. As one might expect, zinc was one of the first commodities to get the axe. In fact, it’s estimated that these production losses will equal about 5,000 to 6,000 tones a week.

In Sichuan province, the government ordered all industrial plants to suspend production for five days while energy was redirected toward residences. As in Europe, this is largely a response to a heatwave that has gripped the country all month. And while five days might seem marginal at best, estimates put the total capacity affected by these outages at nearly 500,000 tons per year.

Insiders may recognize that China is traditionally a net importer of zinc. However, earlier this year, they officially became an exporter. Now, those supplies are in doubt – not just because of this one shut down, but because of the precedent this shutdown sets. After all, Beijing has never been shy about putting China’s interests before those of other nations.


Primary Factors in Zinc Price Predictions

In a market dominated by both constrained supply and dwindling demand, it’s difficult to tell which factor will become the predominant price motivator. Moreover, it can be hard to determine whether or not zinc demand is actually dropping at all, let alone how far it might fall.

In short: everything is still up in the air – for now. What’s more, any one factor discussed here could end up being the primary force behind future zinc prices. Whatever the outcome, there’s no “hedging our bets” on this one. Either demand drops along with supply, or smelters drop the ball on a major global commodity.

By AG Metal Miner

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