TORONTO (miningweekly.com) – Profit margins for zinc miners will probably rise strongly over the next five years, boosted by expected price increases on the back of a widening supply deficit.
According to advisory firm Wood Mackenzie (Woodmac) analyst Jonathan Leng, the next two years, 2016 and 2017, represented the “pinch point” of concentrate supply, with mine-closure-related cuts expected to outweigh new output from projects.
New mines in the pipeline were not nearly as large, and did not boast the high grades that were previously commonplace.
Leng noted that while the price outlook for zinc was dull for 2015, there was potential for an uptick at the end of the year.
The main driver of the zinc market and prices would be the structural issue of whether mine supply growth could keep pace with rising consumption.
“Global zinc consumption is expected to grow steadily by around 500 000 t/y to 2035, which needs to be met by higher mine and smelter output. Meeting this requirement has been made all the more difficult by recent and some major pending closures such as Century and Lisheen,” Leng told an audience during the 2015 Prospectors and Developers Association of Canada’s yearly convention.
Zinc was currently an important industrial metal, adding about 12 times the strength to steel when used as zinc galvanized steel, while about 37.5 lb of zinc went into each new car. Zinc used in fertiliser had also been shown to improve crop yields by up to 30%. Leng noted that the emerging use of zinc in fertilisers had the potential to add about one-million tonnes to the demand side in the long term.
Woodmac had forecast 2015 to be the fourth year of global refined deficit and the year when the sustained drawdown of general inventories could start to manifest itself in the form of lower exchange stocks, which was expected to support a sharp rise in the zinc price.
“A projected tight refined market, with overall inventory well below the historical average, and sharply declining exchange stocks, lent momentum to further price increases to a cyclical high in 2018,” he advised.
Leng said closures, attrition and demand growth would create the need for 3.8-million tonnes a year of new zinc production by 2020.
However, even if the entire population of currently identified possible and probable projects were built, it would only replace 2.7-million tonnes of the requirement, at an estimated cost of $8.4-billion.
While there was no shortage of projects, few of the more than 400 probable and possible mines had the required quality, or were already at an advanced stage of development, to dampen the widening supply deficit. Many of these projects were also facing technical challenges or political issues.
He pointed out that while the majors had mostly pulled out of zinc project development, leaving it up to the juniors and midsized companies, these companies were dealing with a financing crisis.
“Financing for zinc mine projects remains a key issue. Mining majors are able to access finance to proceed with project development, such as Vedanta, which is advancing the Gamsberg project, in South Africa.
“However, few zinc projects are owned by majors or State-owned entities and financing for juniors continues to be a challenge,” Leng emphasised.
Further, the average cash operating costs at existing mines and advanced-stage projects were forecast to rise by around 11% in real terms over the next five years, with the largest contribution to cash operating cost inflation coming from treatment charges. Higher zinc prices could trigger the reopening of higher cost mines, which would further raise the average operating cost.
“Mine capital cost escalation has eased since 2006/07, but it is still above global inflation,” Leng highlighted.
Overall, strong demand growth, restricted supply and falling stockpiles were pointing to a bright outlook for zinc.