VANCOUVER (miningweekly.com) – Several factors have conspired to drive zinc spot prices up 56% since the start of the year, sitting at $1.03/lb on Tuesday, and officially pushing the base metal into bull market territory.

Indicators paint a less bearish picture, including falling inventories and rising physical premiums, Bank of America Merrill Lynch (BofAML) pointed out in its ‘Global Markets Weekly’ report, published Tuesday.

According to the group’s global commodity research team, the zinc price rally was ultimately triggered by a tightening concentrates market on the back of permanent and temporary mine closures.

The impact of these supply losses has been visible in ore shipments, for instance, from Australia and China. Treatment charges have also dropped hard, a dynamic that provided imminent headwinds for those smelters, many of which are Chinese, which bought ore on the spot market and not through contracts, the BofAML advised.

Analysts noted that China’s refined zinc imports have risen as the country’s ore purchases decline – a structural development. Still, BofAML analysts advised that, despite refined shipments rising in recent months, the domestic refined market currently looks well supplied, suggesting that the rally might pause. BofAML pointed out that China’s economic activity and, hence, zinc demand might slow somewhat into the fourth quarter.

However, underlying global demand remains steady, mirrored by a 1.3% increase in galvanised steel production, according to BofAML.

The analysts stated they did not foresee risks for demand growth, especially from China, with galvanised steel, which makes up just above 5% of total Chinese steel output, compared with 12.6% in the rest of the world, excluding China, supporting demand.

“This suggests that pent-up demand persists and could be released through various applications, including a switch from colour-coated to galvanised steels in vehicles,” stated BofAML.

Further, there is room to extend the zinc rally, as increased fiscal stimulus could boost activity. BofAML analysts believe that there is scope for governments, especially in the advanced nations, to become more proactive.

Of the various measures possible, protectionism (anti-dumping measures against galvanised steel), wealth redistribution and outright fiscal spending have been the most discussed.

“Each of these measures has slightly different implications for growth. Fiscal spending may have the most immediate impact on economic activity. After Japan’s government has approved fiscal stimulus, we follow the space closely also in the US in the run-up and after the presidential elections. As such, if necessary economic reforms are accompanied by increased spending, we believe the commodity bull market may continue,” BofAML advised.