Since the start of 2016 zinc prices have increased by over 30% to over $2000 per tonne. Its nearest challenger is tin, up 18% while aluminium and nickel have only posted gains of 10%. Copper and lead meanwhile have barely changed since the start of the year.
Falling production: Several large zinc mines have closed in recent years as reserves have dried up. Meanwhile over the past year other mines have cut production, finally reacting to the earlier fall in prices. According to the International Lead and Zinc Study Group (ILZSG) mine supply outside of China is forecast to contract by 9.4% this year due to a combination of mine closures and price-related cutbacks.
Declining stocks: Refined zinc stocks in LME approved warehouses have declined by almost 60% over the past year. However, some in the market believe that stocks have just been moved to other warehouses rather than actually being used by industry.
Higher Chinese demand: More than half of zinc production goes into coatings to protect steel from corrosion. According to the World Steel Association Chinese production hit 70.5 million tons in May, up 18% from January/February levels. Indeed, China’s imports of refined zinc climbed about 45% in the first five months of the year.
The concern is that any further rebound in the price will discourage other miners from cutting production, or indeed those that have already cut from ramping up output. Indeed, a look at historical base metal price cycles suggests that zinc prices just haven’t stayed low enough, for long enough to create the necessary environment for a sustained rebound in prices.
Copper and nickel prices tell a different story.
Related article: History points to nickel leading rebound in base metal prices