Zinc prices are likely to edge higher in the next three to six months, as the negative shock to global demand from the Covid-19 outbreak lessens, says financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research.
Support for prices, it notes, will come from a gradual recovery in demand for zinc from the steel sector as mills ramp up production.
The company notes that the latest data from the World Steel Association suggests that the worst of the contraction in global steel production has passed, with output having contracted by 8.7% year-on-year in May.
Crucially, steel production in China looks to be gathering steam, with a 4.2% year-on-year increase recorded in May.
As of June 22, three-month London Metal Exchange zinc had already recovered by 14.7% from a March low of $17 844/t, and Fitch Solutions expects a further rebound in the coming months.
The rebound in steel production, and thus zinc demand, will be particularly sharp in China, notes Fitch Solutions, adding that the country accounts for around half of yearly global zinc consumption.
The sharp weakness in zinc prices since January has, however, forced Fitch Solutions to revise down its price forecast for 2020, with the company now forecasting an average price of $2 100/t for this year, compared with its previous forecast of $2 250/t and an average of $2 507/t in 2019.
This new forecast reflects Fitch Solutions’ view that the rebound in prices will be kept in check by a sluggish reduction in global production capacity over the coming months. The company forecasts global refined zinc production to grow by 2.1% this year, while consumption growth slumps to 0.1%.
As a result, Fitch Solutions expects the global zinc market will post a surplus of 71 000 t this year, compared with a deficit of 189 000 t in 2019.
Fitch Solutions is also revising down its long-term zinc price forecasts as the fundamental outlook has deteriorated.
The company now forecasts prices to average $2 055/t over 2020 to 2024, compared with its previous expectations of an average of $2 145/t.
Prices will remain on a long-term downtrend as the market surplus that emerges in 2020 persists into the long term, it says. This structural decline will be driven by sluggish growth in global steel production, as galvanising steel is the primary use of zinc.
However, Fitch Solutions forecasts that after a rebound in the coming months, yearly steel production growth will steadily slow down in the coming years as a result of declining capacity increases in China and Europe.
In China, Fitch Solutions notes that escalating environmental restrictions on producers and weakening demand growth from the construction sector will cap steel production growth rates, while European producers will cut production in the face of low steel prices.
Given this weakening backdrop, the company forecasts global zinc consumption growth to slow from an average of 2.2% year-on-year from 2010 to 2019 to an average of 1.1% year-on-year from 2020 to 2029. The slowdown in consumption growth will keep the market in surplus over the coming years.
The balance of risk to Fitch Solutions’ price forecast lies to the downside owing to uncertainty over the longevity of the global Covid-19 pandemic. Most significantly, the company notes that there is potential for further downward revisions to its global steel production forecasts if physical distancing restrictions mean that it takes longer than expected to get plants up and running again, or if there is a second wave of the virus.
Further, Fitch Solutions also notes that risks of a second wave of infections and the re-imposition of lockdown measures is only too real, as shown by new and large clusters in northern China in May.
A significant second wave of global Covid-19 infections would also likely result in reduced demand from investors for pro-cyclical assets such as industrial commodities, which would place renewed downward pressure on prices.