ASDRF - Zinc Trends 2019: Smelters in the Spotlight
Zinc had a hard 2019, with prices steadily decreasing following a short-lived spike during the first quarter.
The topic on everyone’s mind within the zinc sphere was the shift from miners to smelters as a driving influence over the metal’s cost — with a growing number of miners and dwindling amount of smelters.
Zinc started the year off in January trading for US$2,460 per tonne, but by December 11, the metal had dropped by 9.6 percent when it traded for US$2,221. Between those two dates, zinc’s price swung up and down, with highs and lows surpassing both of those prices.
For the most part, the metal declined, with zinc on track to close off the year in a worse position than it started.
Zinc trends Q1: Prices spike on tight supply
Q1 2019 was an exciting one for zinc, with the metal’s price increasing by 22 percent over the course of three months. Zinc began the year trading for US$2,460 and quickly began to pick up heat, hitting its peak right before the end of the quarter when it traded for US$2,999.
News from zinc companies began popping up early on in 2019, with Vendetta Mining (TSXV:VTT) announcing that its preliminary economic assessment for its Pegmont project in Queensland would have a lifespan of 10 years. Similarly, Ascendant Resources (TSX:ASND,OTCQX:ASDRF) updated its resource estimate for the Lagoa Salgada (salt lagoon) project in Portugal, increasing its resource base.
The price did occasionally fall, but these dips were typically by about US$100 to US$200 and quickly recovered. FocusEconomics Economist Javier Colato previously told the Investing News Network (INN) that the spike that occurred in late Q1 was mainly due to a tightened supply.
“Zinc prices trended upwards through April mainly as a result of supply constraints. Stockpiles of the base metal at LME warehouses fell to their lowest levels in over two decades during this period, while inventories at the Shanghai Futures Exchange also remained historically low,” Colato told INN.
Zinc trends Q2: Smelters in focus
The spike that ended off Q1 carried over into Q2, with prices reaching US$3,016 on April 1 and US$3,008 on April 12. But this spike was ultimately short-lived: within a few days into April, zinc’s metal began to fall and never surpassed the US$3,000 point again.
Q2 saw the efforts made by Trafigura Group to save the zinc smelter Nyrstar (OTC Pink:NYRSY,EBR:NYR) from bankruptcy by purchasing shares and becoming a major shareholder. In addition, New Century Resources (ASX:NCZ,OTC Pink:NCRE) boosted its zinc production by 50.4 percent from 2018’s fourth quarter, reaching 18,170 tonnes during 2019’s first three months.
The shift in price represents that change in focus from miners to smelters, as discussed earlier.
Helen O’Cleary of CRU Group, talking to INN earlier this year, stated that the zinc spike could be explained by the hoarding of stockpiles by the London Metal Exchange.
“There was a concerted effort to reduce LME stocks to exacerbate the appearance of refined market tightness,” O’Cleary said.
“The sharp fall in LME stocks is partly technical,” she added, citing the fact that demand growth has been lackluster and market participants seeking the metal aren’t reporting any shortfalls in supply.
“Demand weakness in China and in much of the world ex-China suggest that the smelter bottleneck will be on the concentrate side, [meaning] not enough smelter capacity to treat rapidly increasing concentrate supplies, rather than on the demand side,” she added.
This forecast proved to be true, with reports later in the year stating exactly that — an increase in zinc supply without the capacity to refine it.
Zinc trends Q3: Trade talks hurt prices
Zinc’s price continued to falter during Q3, which is also the quarter featuring the metal’s yearly low — US$2,210 on September 3. Over the course of three months, zinc’s price fell by 6.66 percent.
Price chart via London Metal Exchange
During Q3, Nyrstar shareholders ended up taking Trafigura to court, stating that the firm had undue influence on Nyrstar’s operation and had steered the company wrong, losing significant funds since 2016. Trafigura declined to comment at the time.
Meanwhile, Platina Resources (ASX:PGM,OTC Pink:PTNUF) entered a joint venture (JV) agreement with Blue Moon Zinc (BMZ)(TSXV:MOON,OTC Pink:BMOOF) to earn both operatorship and a majority interest in the Blue Moon zinc project in the US.
Zinc prices were further weighed by the intensification of the trade conflict between Washington and Beijing.
“This has dampened the global growth outlook and bruised global manufacturing activity, thus clouding the demand outlook for base metals and driving the overall bearish sentiment recently, including for zinc,” FocusEconomics analysts state in a September report.
Zinc trends Q4: Gains in store?
Unlike the previous two quarters, Q4 saw some brief periods of growth, although the quarter still ended on a loss, decreasing by 6.6 percent between October 1 and December 10. Zinc hit its quarterly high on November 5 when it traded for US$2,593 and its low on December when it traded for US$2,220.50, a 14.3 percent difference in almost a month.
The last three months of 2019 have been eventful for zinc. Nyrstar announced that it would shut down its Langlois zinc-copper mine, citing a study that found it to be ‘uneconomic.’ It was also during the fourth quarter that many companies and analysts re-upped their concerns with the high TC/RCs that now plague the zinc industry.
“TCs are expected to remain high and annual benchmarks are going to be trending higher probably for the next few years,” said Oliver Nugent, an analyst at Citi (NYSE:C) in London. “Mine supply should be outpacing smelter capacity and rebuilding concentrate stocks for the next couple of years.”
In FocusEconomics’ December forecast report, the analysts polled predicted the price of zinc to gain some ground in the short-term amid continued low inventories in the global zinc market.
“However, muted global industrial production and an uncertain economic backdrop remain key downside risks to the outlook,” analysts said.
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Securities Disclosure: I, Sasha Dhesi, hold no direct investment interest in any company mentioned in this article.