VANCOUVER (miningweekly.com) – High commodity prices in 2018 are expected to sustain robust margins for zinc and lead miners this year, as supplies of both metals remain constrained.
According to market research and consultancy firm CRU International, following on from record zinc deficits in 2017 in the range of 650 000 t of refined metal, the industrial metal is expected to remain in sizeable deficit during the first half of 2018, constraining smelter utilisation rates. The zinc price is forecast to peak in 2018, before the cycle turns, research manager Dr Ryan Cochrane told attendees at a mining conference in Vancouver this week.
The combination of scheduled mine closures, Glencore's strategic cuts, and the impact of environmental inspections in China, have depleted global stocks of zinc concentrate. The consequent constraints on refined production ensured that the rally in the zinc price that started in 2016, was sustained with the price moving from $2 556/t at the end of 2016 to $3 309/t at the end of 2017 – a rise of 29% and its highest level for a decade.
Lead supplies, often considered a 'sister metal' to zinc, since they are often found and mined together, are also expected to remain in deficit this year as a relatively slower primary supply response will keep the market in a small deficit, supporting prolonged high lead prices.
According to Cochrane's data, zinc demand is expected to expand by a hair under 2% this year, building on the 14-million tonnes consumption in 2017. This will further slow into 2019, as slackening Chinese demand impacts on the market. CRU expects Asian economies to continue to drive zinc demand growth, but he believes that high prices in 2018 and 2019 could constrain demand.
Global lead consumption is expected to grow at 2% to 2.5% a year from 2010 into the 2020s, which is in scope with the long-term growth trajectory of 2.4% from 1960 to 2016.
Cochrane noted that mine supply cuts are still being felt across lead and zinc markets, with continued concentrate tightness and low-term contracts. He believes that deficits will be supported by seasonal Chinese production slowdowns, with increasing concentrate output expected to outpace smelter capacity during the second half of the year.
In the medium term, zinc mine supply is expected to outpace smelter capacity, which, in time, will support a rebound in term contracts and smelter capacity investments. Primary lead supply is expected to lag primary zinc supplies, as global zinc mine production starts to ramp up again from 2018 onwards.
Meanwhile, investors seeking zinc exposure have limited options, since the top 15 producers on average have less than 20% revenue exposure to the metal. The top producers with more than 50% of revenue exposure to zinc prices include Peruvian zinc miner Volcan, and Canadian producers Trevali Mining and Nevsun Resources.
FOCUS ON ZINC
Market research firm Wood Mackenzie also said this week that its base case mine production capability is forecast to rise by almost 1.1-million tonnes in 2018 which, after allowing for production disruptions, is forecast to result in production growth of 664 000 t. This follows an estimated increase of 785 000 t in 2017.
If achieved, it would be the third-largest year-on-year increase in global mine supply. However, the extremely strong growth in mine supply in 2017 and 2018 is insufficient to replenish global stocks of concentrate, which are forecast to remain at critically low levels, WoodMac advised.
With constraints on smelter production limiting growth in the supply of refined zinc to the market during 2018, demand will draw down inventories of existing metal to levels that will provide the fundamental support for further rises in the price and an escalation of spot premiums. The rise in the zinc price over the past two years represents a significant escalation of raw material costs for zinc consumers. Such high costs are likely to encourage consumers to investigate the potential for reducing or even eliminating the consumption of zinc, WoodMac said.
Zinc's dominant first-use, galvanizing, accounts for around 60% of zinc demand. Zinc, accounts for 8% or often significantly less of the finished steel product by weight. Thus, the cost of zinc makes up a relatively small part of the finished cost. However, there is a danger that this cost could be significant in markets where affordability is important, such as the automotive sectors of India and China.
Total global refined stocks are estimated to have fallen from 2.7-million tonnes at the end of 2016, to 1.8-million tonnes at the end of 2017 – the equivalent of 47 days of global consumption.
Meanwhile, exchange stocks fell from 500 000 t to 250 000 t – the equivalent of six days of global consumption – over the same period.
"The base case assumption is that developments in metal stocks and price will be coincidental with refined metal stocks falling below the critically low-level equivalent to 40 days of global consumption at the end of the second quarter. This provides the basis for the price climbing to $4 000/t in the third quarter, WoodMac said.
"However, as the rapid escalation of the price thus far in 2018 has demonstrated, there is a strong possibility that investor enthusiasm will pre-empt the tightness in the refined market and the cyclical peak in the price could be higher and sooner than our base case assumption of a Q1 2019 average of $4 100/t."