Zinc prices surge on lower stocks

After fluctuating around USD 1900 per tonne for the majority of last year, zinc prices started to increase in December 2013 and then continued to follow this upward trend into 2014.

After fluctuating around USD 1900 per tonne for the majority of last year, zinc prices started to increase in December 2013 and then continued to follow this upward trend into 2014. Prices are currently around USD 2300 per tonne, up 22% since December.

Zinc prices have been rising as a result of the forthcoming closure of a number of large mines as they reach their end of life, combined with the expectation that global demand will continue to grow. There is an expectation that supply will not be able to satisfy growing demand in coming years, with the supply deficit expected to reach 0.12m tonnes in 2014.

The stock levels held by the London Metal Exchange have also declined, down 46% since January 2013, and by 30% since the beginning of 2014, falling back to the levels last seen in 2011.

About zinc

Zinc is a base metal produced by refining mined ores, which are found across the world, and it is often mined together with other metals like lead, copper or silver. Total world resources are estimated at 1.9bn tonnes, with the largest deposits found in Australia, China and Peru. Zinc’s primary use is in the galvanization industry, which involves applying a protective layer on steel or iron products to reduce corrosion.

Zinc is also used in the manufacturing of alloys like brass, which was the first major application of zinc. Zinc can also be used in a range of compounds, making it very useful in a wide range of different industries.

Around 13.5m tonnes of zinc are produced annually, with about half of this output used for galvanising and about a third in brass, bronze and zinc alloying. The construction and transport industries account for about 70% of zinc consumption.

Supply and Demand

Zinc prices have risen due to both the expected closures of zinc mines reducing global supply growth and also the continual increase in global demand.

One of the largest mines due to be closed as its resources become depleted is in Australia. Century mine is the third biggest open-pit zinc mine in the world and produces nearly 0.5m tonnes of zinc per year (about 4% of world supply). Between now and its scheduled closure in 2016, the mine will be gradually reducing its output. There are plans in place to offset the closure by opening new mines, which should be fully operational next year, but the closure of a site of this importance will inevitably have an impact on the global market.

Growing demand is also influencing prices, driven by the recovering global economy which has led to increased activity in the construction and automobile industries, the major zinc consumers. The continuing economic growth seen in Asian countries, China in particular, is fuelling the expansion of these industries and has led to the rise in demand. For example, automobile sales in China increased by 15% in 2013 y-o-y, and have continued to grow with an 8% y-o-y rise in the first half of 2014. In the construction industry, China, India and Japan are all expected to continue to grow strongly in coming years.

Outlook

Despite the closure of some large mines, the overall supply of zinc is still expected to increase as new plants come online and a number of mothballed plants are due to restart production as the market becomes more profitable. World production of refined zinc is expected to increase by 4.4% to 13.46m tonnes in 2014, with output from China rising by more than 7%. Output will also be higher from the US, where new production units started in May, with the expectation that production will rise by about 10%.

However, demand is expected to outpace supply, and will grow by 4.5% y-o-y to 13.58m tonnes in 2014. China is the largest zinc consumer in the world (accounting for 45% of global annual consumption), and the expansion of demand here has a big impact on the global zinc market. Demand for zinc increased in China, by 8% in 2013 y-o-y, and is expected to be higher by another 6% in 2014. Demand is also expected to see some rises in Europe and the US next year, by 3% and 2% respectively.

With demand expected to exceed supply by 0.12m tonnes in 2014, zinc prices are likely to be shaped by how quickly the new capacity additions come online to replace the lost supply. The market will also continue to be closely tied to the construction and automobile industries, with the continuing growth expected in these sectors likely to support zinc prices in coming months.

By Monika Sosnowska

Monika is a data analyst and market researcher at Mintec. She is fascinated by analyzing large quantities of data to improve her understanding of the changing market situation and prices as well as improving her decision making process. This prompted her to undertake her current master degree studies in GIS (Geographical Information Systems). She also holds a degree in Oceanography from University of Gdansk (Poland). Her current work involves reporting on wide-ranging markets covering building and industrial materials, chemicals (incl. fertilizers and food additives), plastics, wood, pulp and paper and textile materials.

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