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Zinc prices are up 37% year-to-date, making them the best performing base metal in 2016. The question is now whether the rally can be sustained.
In 2015 the commodities market was drowning in oversupply, and zinc was no exception. Then two key zinc mines were closed – Century in Australia and Lisheen in Ireland. Together, the mines produced over 630,000 tonnes of the metal, and when this is added to the capacity lost by the closure of some of Glencore’s mining operations, we reach a figure of over one million tonnes.
Indeed, this zinc production deficit has been intensifying in 2016. Glencore cut output of the metal by 31% in its first-half, to 506,000 tonnes, thanks to the halts in production in Peru and Australia. Belgian firm Nyrstar cut zinc output by 39% in its first six months, as the commodity industry looked to take steps to fight falling profits by cutting back on production. These cutbacks are taking place at the national level too, as China shuts down all lead and zinc mines in parts of its Hunan province. A Chinese deficit of 9000 tonnes in 2015 is expected to grow to a shortfall of nearly 400,000 tonnes for 2016.
As the deficit takes effect, it is likely that demand is going to rise as well. Infrastructure developments in China and in key Western markets should see the world’s appetite for zinc rise, with forecasts from Goldman Sachs suggesting that prices will hit $2500 per tonne, from the current $2371 per tonne. Its main use is as a galvanizer, protecting steel and iron from rusting, as well as its combination with copper to produce brass and other metals to make car components.
The bank is particularly bullish on zinc for the next few months, thanks to the combination of production cuts and rising demand. Significantly, however, it then thinks the strength in price will begin to fade, as mining firms boost production to take advantage of higher prices. In fact Chinese production could start to rebuild as soon as the first quarter of 2017, according to Goldman, while Glencore and other key firms will follow later in the year.
From a seasonality perspective, we are entering a strong period for zinc prices. Over the past 20 years, the average return in zinc from October to the end of February is around 5.64%. Thus there could well be more gains in store for the metal, before rising prices alter the supply dynamic and start to take the edge off one of the best performers in commodity markets in 2016.
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