Research agency Fitch Solutions has revised its forecast for the zinc price for this year to $2 250/t, down from $2 450/t previously - the result of an amalgam of market forces put in motion by the Covid-19 outbreak, which has led to factory shutdowns in China and other parts of the world.
The average zinc price achieved last year was $2 507/t.
Fitch says that as elevated treatment charges incentivise zinc smelters in China to ramp up output in the second half of this year, this is likely to lead to a reduction in the supply deficit in the market.
The agency explains that, prior to the Covid-19 outbreak, zinc treatment charges remained elevated throughout 2019 and into 2020 as an increase in available zinc concentrate allowed smelters to charge higher rates.
While Chinese zinc smelters had ramped up operating rates to capitalise on the profit opportunity, with the average rate across all sized producers in China having reached 87.9% in January, Fitch expects that the Covid-19 outbreak has since caused a reduction in those rates owing to the lockdowns of various countries in an attempt by governments to halt the spread of the virus.
As a result, treatment charges have reached highs of $300/t, a level not reached since 2008.
Assuming Chinese zinc smelters ramp up operating rates over the remainder of this year to capitalise on the higher treatment charges, Fitch expects this will lead to increased primary zinc output in 2020 and allow the supply deficit to narrow.
“However, we do note the loosening will be capped should smelters reach maximum capacity utilisation. For example, in January 2020, large refined zinc producers in China already reached operating rates of over 100%, according to Bloomberg data, while medium- and small-sized producers still had room to improve.
“Should operating rates max out as economic activity improves over the second half of the year, this will cap the increase in refined output in the medium term and further support our expectation for prices to rebound slightly over the back half of the year, bringing the 2020 average zinc price closer to $2 250/t,” Fitch explains.
In the longer term, the agency expects prices to remain on a gradual downtrend as the production balance shifts into surplus on the back of slowing demand growth from the steel sector.
Fitch says global primary zinc production should grow by 2.8% year-on-year this year, compared with 2.4% year-on-year growth in 2019, which will further narrow the supply deficit in the market.
This while steel production will slow from a 4.7% year-on-year growth rate in 2019 to 0.7% by 2029. This is on the back of slowing capacity increases in China, as the Chinese government works to curb pollution, while underperforming steel prices in Europe weigh on major producing countries in the region.
Fitch, therefore, anticipates global zinc consumption growth to slow from an average 2.2% year-on-year growth rate over 2010 to 2019, to an average 1.1% year-on-year growth rate over 2020 to 2029.
This will push the zinc market into surplus by 2023.