Just what does 2020 hold for the less popular — but still very useful — zinc?
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It doesn’t get the kind of coverage that metals like iron ore, lithium or gold get, but zinc is nonetheless an important element that is used in many industrial processes.
Zinc is most commonly used as a coating for steel and iron – galvanisation – to prevent rusting.
It is also alloyed with other metals for many common applications, as a replacement for lead in weights, as a white pigment in paints and in the manufacture of other chemicals.
Consultancy Wood Mackenzie says the key driver for the zinc market in 2020 will be the performance of the world’s zinc smelting industry.
Other factors include the easing of trade tensions between the US and China, the struggling manufacturing sector and a build up of concentrate stocks.
“With every 1 per cent change in Chinese utilisation equating to 77,000 tonnes of refined output, Chinese smelter utilisation rates is the key issue facing the zinc market in 2020,” Woodmac research director Andrew Thomas said.
“Although ex-China smelters have been important in recent years, it is the Chinese that have the most influence on the balance of the zinc market.”
While environmental compliance was a problem for the sector in 2018, Chinese smelters have gradually upgraded their facilities since and achieved 85 per cent utilisation in the fourth quarter of 2020.
But the key question, according to Thomas, is whether they can sustain operating rates at these elevated levels.
Additionally, China is looking critically at sulphur dioxide emissions and should a decision be made to prevent pollution by imposing new standards on imported concentrate, it could reduce the availability from China’s traditional suppliers by as much as a third.
“These environmental issues, together with limited access to credit for private sector smelters and modest Chinese demand growth, will not allow runaway growth in Chinese refined production in 2020,” Thomas said.
“Therefore, we forecast that Chinese utilisation rates will lift to 83 per cent in 2020, resulting in Chinese output growing by 5.4 per cent, or 320,000 tonnes, in 2020.”
Thomas also noted that with 400,000 tonnes of new mine supply forecast to enter the market, global stocks of concentrate were set to become excessive in 2020.
“With most of the world’s smelters carrying normal levels of stock and having limited storage capacity, the storage and financing of unwanted concentrate is set to become an issue,” he said.
Thomas explained that this could force miners to hold stocks of unsold concentrate, which could in turn force mines that produce less desirable concentrate to adjust output to match offtake, which would reduce foundation and possibly lead to mine closures.
He noted that while zinc demand is forecast to stage a modest recovery and expand by 1 per cent in 2020 after two consecutive years of annual contraction, further economic uncertainty could easily scuttle this.
Thomas explained that the global automotive industry – an important end-use market for zinc – was facing considerable uncertainty that could result in little or no growth in overall automotive output.
“Another source of uncertainty for zinc demand is the forthcoming US presidential election. In previous election years, this has often resulted in companies slowing the pace of business investment,” he said.
“The converse is that the pace of investment is likely to accelerate once the outcome is known.”
The phase-one trade deal between the US and China could raise zinc prices, though Thomas warned that its limited scope meant that any recovery would likely be modest and could be temporary.
“If sentiment were to improve significantly, possibly as interest rates are cut in key economies and international tensions ease further, the zinc price may re-engage with its fundamentals of low metal stocks and revisit the highs of over $US3,000/t seen in 2018,” he concluded.
So just who are some of the ASX-listed small caps with exposure to the zinc market?
The aptly named Zinc of Ireland (ASX:ZMI) is currently drilling to add more tonnes to its current Kildare project resource of 9 million tonnes grading 9.5 per cent zinc and lead.
Consolidated Zinc Limited (ASX:CZL) produces zinc from its fully-owned zinc-lead-silver operation in Plomosas, Mexico. Rates are expected to increase as more stopes are opened up at the mine.
Meanwhile, Platina Resources (ASX:PGM) recently reported an intersection of 1.71m containing more than 50 per cent zinc, the highest grade that the company has hit at the Blue Moon zinc-copper-gold project in California.
Alta Zinc (ASX:AZI) has also enjoyed some high-grade zinc hits from drilling at its Gorno project in northern Italy which it says demonstrates that it has further exploration upside beyond historically known zones of mineralisation.