Zinc CBS March 2023 – Prices tempered by central bank hawks

In its monthly Zinc Commodity Briefing Service, or CBS, reports, S&P Global Commodity Insights discusses the zinc market within the broader macroeconomic environment and provides rolling five-year supply, demand and price forecasts.

Key findings

* The London Metal Exchange three-month, or LME 3M, zinc price fell in February due to bearish sentiment driven by the hawkish U.S. Federal Reserve. Along with near-term recessionary risks, this has diminished net long zinc positions. The price has been moving rangebound since the start of March, supported by chronic spot scarcity.

* With the Chinese economy recovering faster than expected, despite its property sector weakness, we have increased the country's refined zinc demand forecast to rise 1.5% in 2023.

* With our upgraded demand forecast for China, we expect global refined zinc consumption to rise 1.3% in 2023, followed by 3.3% in 2024. However, we have maintained our demand expectations for the U.S. and Europe, with further interest rate hikes expected to weigh on economic growth in 2023.

* There are mixed trends on the supply front. Nyrstar NV announced the restart of its Auby zinc smelter in France, while power shortages in Yunnan are curbing smelter operations. We expect global refined zinc supply to rise 1.9% in 2023 and 3.5% in 2024. As for mined supply, we have trimmed Australian output due to operational disruptions and safety issues, with global mined zinc output forecast to grow 2.6% in 2023, followed by 2.8% in 2024.

* Our recent adjustments show a narrowed deficit in the zinc market at 184,000 tonnes in 2023, which, along with recently softer prices, prompted us to downgrade our LME 3M average zinc price forecast to $3,315 per tonne. We now expect shallower deficits and estimate the price to average $3,008/t throughout 2024-2027.

The zinc price was turbulent throughout February as central bank hawkishness and recessionary symptoms outweighed supply tightness in the zinc market. Given China's accelerated recovery, however, we have upgraded global refined zinc consumption to rise 1.3% in 2023. Abating energy costs in Europe have led us to upgrade our forecast global refined zinc production to rise 1.9% year over year, but we remain cautious as persisting power shortages in China can easily offset European supply growth. These have led us to a narrower refined deficit of 184,000 tonnes and a downgraded zinc price forecast of $3,315/t in 2023.

Analyst comment

The LME 3M zinc price dropped sharply in early February as a hawkish U.S. Federal Reserve hinted at further interest rate hikes in 2023 to combat inflation. Since then, the zinc price has been moving rangebound at between $2,900/t and $3,100/t as the U.S. dollar strengthened. Mixed signals have characterized zinc fundamentals amid near-term demand uncertainties, power rationing in China and Nyrstar's Auby smelter restart; moreover, a seasonal inventory accumulation has depressed zinc net long positions at the LME.

A gradual recovery in China's manufacturing sector is underway, with the NBS and Caixin PMIs rising to 52.6 and 51.6 in March, respectively. With the support of the People's Bank of China, the property sector's financing environment for developers has improved, and home sales have risen for the first time in 20 months. Signs of improvement in China's real estate sector have yet to buoy construction activity, although a season upturn is expected in the coming months. Further, China's automotive production dropped 34.2% year over year in January, following a slowdown of electric vehicle sales as government subsidies ended. Galvanizing and die-cast operations have resumed since the end of the Lunar New Year holiday in late January, but along with steel mills in Tangshan City, have been constrained by environmental controls to improve air quality.

Since easing COVID-19 restrictions in November 2022, China's government has been targeting policies on expanding domestic demand and rebuilding consumer confidence. However, we expect the fragile property sector, drought-driven power instability in southwest China, and muted downstream demand to pressure 2023 Chinese refined zinc consumption to grow by a modest 1.5% year over year to 7.1 Mt. Nevertheless, we expect stronger economic momentum in the second half and into 2024, boosted by the government's spending plans for infrastructure, transmission lines and renewable energy, which are expected to help boost Chinese zinc demand by a forecast 2.3% in 2024.

The U.S. ISM PMI rose month over month in February but remained in contractionary territory at 47.7, despite robust construction spending, domestic automotive production and industrial production in January. Further, the IHS Markit Eurozone PMI declined to 48.5 in February, despite strong new passenger car registrations the prior month. Elevated inflation has thinned out disposable income and consumer confidence in these economies. However, inflation in the U.S. has moved past its peak, while energy prices in Europe have eased thanks to a mild winter and an influx of U.S. crude shipments. With the Fed and European Central Bank expected to raise interest rates further in 2023 to tackle inflation, we estimate global refined zinc consumption to rise 1.3% to 14.0 Mt in 2023. For 2024, we foresee it growing 3.3% as the global economy recovers.

Encouraged by declining energy prices in Europe, Nyrstar announced the resumption of its Auby zinc plant in France. With the smelter having completed planned maintenance in February, 150,000 tonnes of refined zinc capacity is back online. Given ambiguous market conditions, however, Nyrstar expects it to operate on a variable basis. The company also has zinc plants at Budel Dorplein in the Netherlands and Balen/Overpelt in Belgium, with the former restarting with limited production in November 2022. Chinese supply is vulnerable, with a hydropower energy shortage in Yunnan province in late February leading domestic zinc smelters to thrift energy consumption, some of which cut production between 10% and 20% or entered maintenance starting in March. Zinc producers in neighboring provinces had also curbed production, including recycling companies that significantly reduced utilization rates. Thus for 2023, we expect global refined zinc supply to only increase 1.9% to 13.8 Mt, followed by 3.5% growth in 2024.

On the mining side, MMG Ltd. suspended operations at Dugald River in Australia after two casualties were reported after a fatal underground backfill collapse. Further north, the Century zinc mine of New Century Resources Ltd. halted production due to heavy rainfall but continues maintenance and dewatering activities. In Peru, exports have started to normalize after months of community protests and blockades. Such disruptions, whether driven by technical concerns or political unrest, can further soften treatment charges, with China imported and domestic fees currently standing at $240 per dry metric ton and 5,050 yuan/t, respectively. For 2023, we estimate global mined zinc output to rise 2.6% to 13.4 Mt due to reserve depletion and lowered production guidance. We expect 2.8% growth in 2024 with the help of commercial production from the Ozernoye mine in Russia, a joint venture of China Nonferrous Metal Industry's Foreign Engineering and Construction Co. Ltd. and MBC Resources Ltd. (Metropol).

Outlook

Seasonal refined zinc inflows and muted demand have led to inventory rebuild at the major metal exchanges. However, despite zeroed-out on-warrant supply at LME warehouses in Europe and the U.S., net long positions have exited due to recessionary risks. Nonetheless, supply-demand dynamics still point to a significant market deficit in 2023. However, looser supply has led to us narrowing our refined zinc deficit forecast to 184,000 tonnes and lowering our estimate for the LME 3M zinc price to average $3,315/t in 2023. We estimate shallower deficits throughout 2024-2027 and for the price to average $3,008/t.

Boliden AB (publ)'s Odda refinery in Norway will add 150,000 tonnes of new refined zinc capacity upon completion in 2025. Funded by green bonds, the smelter will also be engineered to produce low-carbon zinc, thereby reducing energy and waste intensity by 5% and 30%, respectively. Korea Zinc Co. Ltd. is also keen to decarbonize its operations and is exploring using hydrogen-electric vehicles for haulage at its partially solar-powered SMC refinery in Australia.

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