Weak China demand to offset scarce zinc supplies
Shortages and low stocks in London Metal Exchange-approved warehouses will help buoy zinc prices, but slowing growth and demand in top consumer China are expected to weigh on the metal used to galvanise steel.
Benchmark zinc prices CMZN3 hit a record peak of $4,896 a tonne on March 8 on worries about supplies, particularly in Europe where record-high power prices have triggered production cuts.
Prices have since retreated to $3,640 a tonne, but that is still more than 20% above levels in September when the power crisis intensified in Europe, which accounts for about 15% of global production capacity of refined metal. Global zinc supplies are estimated at around 14 million tonnes this year.
“Inventories are low and the supply side is challenged. The problems stem from poor smelter economics in Europe and the possibility of mining production losses in South America,” said Jay Tatum, portfolio manager at Valent Asset Management.
“But in recent weeks, the world has rapidly reassessed growth rates, particularly in China, which means prices must adjust. Zinc’s outlook is particularly volatile from here.”
Some copper production has already been hampered by community protests in Peru, the world’s second largest producer accounting for 1.6 million tonnes of zinc last year according to U.S. Geological Survey.
The possibility of these protests spreading to zinc mines is a worry for the market.
Shrinking manufacturing activity in China due to COVID lockdowns, slowing export growth and stagnant imports are behind the recent sell-off.
Zinc stocks in LME warehouses at 88,475 tonnes are at two-year lows. But cancelled warrants — metal earmarked for delivery — at 58% of the total suggest a tighter LME market as more zinc isdue to leave warehouses.
Bank of America analyst Michael Widmer expects zinc supplies this year to meet demand compared with a surplus of 386,000 tonnes last year and a deficit of 42,000 tonnes next year.
“Supply growth remains low with demand supported by restocking. Zinc will likely remain volatile near term with the immediate downside limited,” Widmer said.
“Unreported inventories exist on the zinc market and more metal could become available.
Source: Reuters (Reporting by Pratima Desai; Editing by Bernadette Baum)