EC Zinc: Back On Track After A Turbulent Year Of Mine Supply

After a turbulent year of zinc mine supply, the market is set to return to growth but this is unlikely to happen until after the first quarter. Macro tailwinds remain supportive to prices. However, the velocity of credit expansion and tighter borrowing criteria in the property market remain a concern for the pace of China's demand growth.

Source: Shutterstock

Concentrate market is key, and the tightness could continue into 1Q21

  • Zinc increased to a two-year high amid macro tailwinds and tightness in the concentrate market. As we have discussed before, zinc mine supply has been hardest hit by Covid-19 related disruptions, particularly from Peru earlier this year.
  • Australia, the top supplier of zinc concentrate to China, was able to divert more concentrate to China earlier this year (Fig. 1), partially offsetting the losses caused by disruptions in Peru. Since 3Q20, Peruvian zinc mine production appeared to be back on track (Fig. 2) though shipments to China have fluctuated in recent months. Chinese zinc mine supply improved over the summer, with spot treatment charges seeing a moderate recovery.

Fig 1.China zinc concentrate imports by country

Source: China Customs, ING

Fig 2. Peruvian zinc mine production

Source: MINEM, ING 

  • This didn’t last into the fourth quarter as expectations over smelters' winter restocking activities further exacerbated the tightness in the concentrate market, which was also fuelled by a mine accident at Vedanta’s Gamsberg mine in South Africa on 18 November. The spot TCs (import market) have fallen to around US$80/tonne compared to US$310/t at the beginning of the year, down by 74% year-to-date. Meanwhile, following reports on seasonal suspensions at several domestic mines in Northern China, the TCs for the Chinese home-produced concentrate have also come under continued pressure. Falling TCs have been weighing on smelters’ margins (Fig. 3), though historically the current implied margins (based on domestic concentrate) are still better than we saw back in 2016/17 partly due to relatively higher by-product revenue.
  • Looking ahead, we expect the concentrate market tightness to continue into the first quarter and should improve towards the second half of the year. For the full year, we currently expect a moderate surplus (90kt) in the concentrate market balance. This is based on estimates that there will be net growth of 450kt zinc mine supply next year through mining expansions/new projects. However, we also assume that Gamsberg could return to operation somewhere in 1Q21 and that mines in South America continue to recover. 
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