For a metal in which trading is normally as sedate as a cup of tea, zinc had a surprising amount of flash and crash over the last two months.
Between March and May three month LME futures traded in a range of more than $1,000 a metric tonne, they rallied from around $3,600 to a peak of $4,896 and back to $3,714 today as traders tried to work out whether electricity costs or the spread of Covid in China would play a bigger role over the next few months. From where we sit, the high cost of electricity is not going away, while Covid is likely to be coming and going in waves.
The problem with electricity
Zinc prices started rising late last year, months before the conflict in Ukraine reared its ugly head, as the cost of electricity in Europe forced some major European producers to temporarily close down production, or as it is known in the industry to put it into “care and maintenance.”
Europe’s largest zinc producer Nyrstar, which is owned by the commodities trading house Trafigura, closed down its zinc refining plants in the Netherlands and Belgium last October and Glencore followed suit in November with a zinc sulphide plant in Italy. To make up for the shortfall Nyrstar upped its output in Australia and Glencore kept its other plants going, including production in Kazakhstan, but this nevertheless created a shortage in Europe which normally produces 15% of the total global zinc.
Since October the stock levels of this metal, used mainly to galvanise steel for construction and infrastructure, have declined to a historic low. In April alone LME warehouse stocks dropped more than 40% and are currently at a very low 86,800 tonnes.
Looking at where natural gas prices are going (electricity companies mostly use natural gas or coal to produce electricity) it is clear that the already high electricity prices will only get higher, particularly the moment the weather gets colder. The conflict in Ukraine and the sanctions against Russia are only exacerbating this situation because Europe is now importing gas from the US to make up for the shortfall of Russian supplies.
Covid issues for zinc
The other side of the coin is that while stocks in Europe are falling, zinc stocks in the Shanghai Futures Exchange’s warehouses are piling up. The latest wave of Covid in China has led to a lockdown in Shanghai and now also in Beijing, and the longer it lasts the more it is slowing down infrastructure and construction projects in China, leading to an oversupply situation for zinc.
The situation will change from week to week depending on how Covid continues to spread. Shanghai is just beginning to loosen its lockdown restrictions as other parts of the country are introducing theirs. Overall, only a relatively small part of China’s overall zinc production and demand seems to be affected at the moment but there is an overall caution towards bigger projects.
Before the latest wave of Covid, China also had issues with power consumption and carbon emissions from zinc production, although on a smaller scale than Europe, and those will likely continue even once Covid-related problems are resolved.
Taking both electricity and Covid issues into account the International Lead and Zinc Study Group is forecasting an output-demand shortfall of 292,000t this year, up from a shortfall of 193,000t in 2021. This means that while zinc prices could temporarily adjust down a little, the overall trend will be in favour of higher prices for the better part of this year.
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