Zinc prices have been sliding since April and look set to fall even more amid concerns of an approaching market oversupply.
Prices on the London Metal Exchange (LME) sunk to a six-month low of US$2,371 per tonne on Tuesday, down a further 1.3% from Monday’s closing price of US$2,403/t.
The price slid under the early January low of US$2,460/t and is getting troublingly close to last year’s mid-September price of US$2,285/t.
Zinc on the Shanghai Futures Exchange also hit its lowest point since January of 19,190 yuan per tonne, keeping pace with the metal’s descent on the LME.
The year 2019 started with the zinc sector in deficit due to rapidly depleting zinc mine reserves and minimal funds being invested into finding new reserves.
Zinc stocks on the LME had just emerged from 10-year lows in the December 2018 quarter and prices were up slightly on this tight supply, coupled with increased consumption.
However, at around US$2,500/t, zinc wasn’t nearly as high as early 2018, where it reached more than US$3,500/t.
If you look at the price chart over the last three years, the zinc has been forming a distinct head and shoulders pattern, which is thought by analysts to be an indication of a bullish-to-bearish trend reversal.
In simpler terms, this means an upward trend looks to be nearing its end – and we seem to be reaching the tail end of it now.
Why is this happening?
The falling price has been rationalised by analysts as an indication of a better supplied market, signalled by rising Chinese production and a collapse in the premium for cash metal on the LME.
According to Deutsche Bank analyst Nick Snowden, rumours that zinc is moving from Chinese bonded storehouses into the LME warehouse system is also pushing prices down.
“You could see more downside to the low $US2,000s,” he told media.
However, Mr Snowden added that prices were unlikely to fall much more because of the depressed level of warehouse stocks.
According to market data, refined output from zinc’s top producer China was up 7.4% to 480,000t in May, compared to the same time a year ago.
This higher output appears to have eased the supply deficit experienced at the start of the year.
However, data from the Shanghai Metals Market (SMM) shows there may be limited upside in supply, with nationwide output coming close to its expected peak monthly output of 500,000t in June.
In addition, zinc smelters in China are expected to enter their maintenance season over July and August, meaning zinc supply is forecast to only marginally rise over the next few months.
Although, treatment and refining charges in China have hovered around an all-time high of $240/t since May, which could suggest the country’s smelting capacity has not matched the processing need for concentrate.
“We see further downside room in zinc prices as treatment charges for domestic zinc concentrate have yet to substantially fall, which means that miners could still endure the current zinc price levels,” SMM stated.
“If it costs 10,000 yuan to produce 1t in zinc content of concentrate, miners and smelters now see similar profit margins after zinc prices fell from 21,000 yuan/t to 20,000 yuan/t,” it said.
Meanwhile, Morgan Stanley analysts have also adopted this bearish outlook, forecasting the metal to continue sliding from its current level to trade around US$1.00 per pound ($2,205/t) through most of 2020, before lifting to US$1.08/lb (US$2,381/t) in 2021.
In a note to media, the analysts agreed that growing smelter output, incentivised by high treatment charges, would likely “tip zinc’s market into surplus, putting downward pressure on price by the end of the year”.