VANCOUVER (miningweekly.com) – Zinc’s 66% rally this year is expected to continue in 2017, according to analysis by Bank of America Merrill Lynch (BofAML) Global Research.

Analysts believe the shortfall in mine output (concentrates) will be around 391 000 t this year, making this the largest deficit since 1993.

“Shortfalls to that tune are only possible because smelters can draw on inventories that were built in recent years. Factoring in an increase of mine output at Antamina to 350 000 t in 2017 from 163 000 t this year, but pushing back the resumption of full activity at some of Glencore's mines towards the end of 2017, we expect concentrate markets to remain tight,” BofAML stated.

Given a relatively empty mine project pipeline, concentrate inventories could potentially reach an extremely low seven weeks of demand by 2020, from 51 weeks in 2014.

BofAML’s ‘pain and gain’ matrix highlights that the current environment places enormous strain on smelters. As such, concentrate purchases by Chinese smelters have been hovering at multiyear lows this summer. “Putting it all together, this dynamic reinforces our view that zinc will see more upside next year,” the research team found.

‘NO-MAN’S COMMODITY'
BofAML believes that zinc's strong performance is not unusual, owing to the supply side of the metal being the least consolidated in the base metals space, making zinc “no-man's commodity”.

The lack of imminent strategic focus on zinc by many large miners has contributed to a relatively empty mine project pipeline.

“With global demand holding up, we therefore believe that prices of the metal are well supported. Looking at the physical market, we note a convergence between LME quotations and premia, suggesting that zinc is not just supported by the paper trading.

“Having said that, the positive fundamental backdrop comes with a slight wrinkle right now,” analysts stated.

According to the report, China over-imported refined zinc in the second half last year and in the first half of this year, with the incentive to ship metal to the country subsiding over summer, similar to copper, which led to the recent bout of weak imports. This slowed the pace of price increases, although the country's physical market is now normalising, BofAML said.

The length of the typical bull market has reverted to 12 to 18 months, similar to the average seen over the past 40 years, analysts stated.