SMM analysis: Impact of COVID-19 global spread on zinc demand and supply

SHANGHAI, Mar 19 (SMM) – Worries about the economic impact of the COVID-19 pandemic have roiled global markets, knocking zinc prices to almost four-year lows.

The virus has shuttered scores of automakers and consumer electronics manufacturers in Europe, which is set to significantly affect zinc consumption. The fallout is set to spill over to the global zinc industry, as European zinc consumers rely heavily on imports and as virus containment measures may constrain logistics and slow port operations.

The impact is likely to spread to Chinese zinc producers, who have been grappling with slow domestic zinc consumption recovery.

Plunging zinc prices may prompt mines to curtail production, while travel restrictions to contain the spread of the virus are likely to disrupt cargo shipment, as witnessed in China. That is, however, is expected to have limited impact in the short term as smelters outside China have raw materials stockpiles.

Zinc ore

China is the world's biggest zinc producer and consumer. The country’s zinc ore output, accounting for about 34% of the world total, could only satisfy about 71% of its consumption at smelters in 2019.

The second, third and fourth largest zinc ore producers worldwide were Peru, Australia and the US, and their output far exceeded their demand, which made them major zinc ore exporters.

Major buyers of Peruvian zinc ore were China, South Korea, Spain, Brazil and Japan, and their combined imports accounted for 64% of Peru’s total zinc ore output last year.

China and South Korea were also major buyers of Australian zinc ore, accounting for 66% of Australia’s total exports in 2019. About 44% of US zinc ore output in 2019 was exported to Canada and Spain.

Australia and India were the major drivers of zinc mine production increase in recent years. The top 10 producers’ zinc concentrate output accounted for more than 80% of the world total in 2019.

Source: SMM

Asian and Europe are home to major zinc ore importers, as European countries have a low degree of self-sufficiency and Asia’s South Korea and Japan barely produce zinc ore. The top 20 producers’ zinc ingot output accounted for 96% of the global total.

New coronavirus cases in China have nearly ground to a halt, while the virus is spreading rapidly outside China. This has yet to lead to shutdowns of zinc mines or smelters, but the possibility of production curtailments at zinc mines outside China lingers.

Virus containment measures are likely to lead to port congestion, logistical constraints and manpower issues, as witnessed in China, which will affect deliveries of zinc ore. But this is unlikely to have significant impact on smelters in the short term, as zinc smelters outside China have stockpiles of raw material.

With falling zinc prices squeezing profits across the industry, Chinese zinc mines may trim production. Chinese zinc mines have been struggling to push treatment charges for zinc concentrate lower amid the competition from imported materials. Imported zinc concentrate has been favoured by Chinese smelters this year, as the virus outbreak in China opened the import arbitrage window. TC offers for imported zinc concentrate in China currently stand at $270-290/dmt.

Coronavirus pandemic fears also dealt a blow to prices of the byproduct of refined zinc production—silver, which further eroded profits at zinc mines.

A collapse below 15,000 yuan/mt in zinc prices would take prices of zinc ore to below 9,000 yuan/mt, near the 75th percentile cost curve of Chinese zinc mines, according to SMM calculations based on zinc ore prices of 6,200 yuan/mt of Zn content.

Refined zinc

Consumption of refined zinc has taken a hit following the coronavirus outbreak in China, and the pain is set to deepen as the disease spreads to other countries.

Source: SMM

The degree of zinc ingot self-sufficiency in China stood at nearly 94% in 2019, as China’s zinc ingot output accounted for 46% of the world total and consumption took up 61%, while the self-sufficiency ratio in the other 9 of the world’s top 10 zinc ingot producers all exceeded 100%, indicating their reliance on export business.

Source: SMM

In Asia, countries beyond China accounted for 21% of the global zinc consumption, with South Korea and Japan taking up 3.46%.

The outbreak in China disrupted parts supply to automakers and electronics manufacturers in South Korea and Japan in February, forcing some of them to suspend production, and manufacturers there had to suspend for another several days after new cases in the two countries spiked before there were signs of containment.

Iran has also been hit hard by the virus, but the impact on zinc consumption was limited as the country accounted for just 0.3% of the world total zinc consumption in 2019.

Infections in India, the world’s third biggest zinc consumer, remained low, and manufacturing activity there has not been affected. India accounted for 4.8% of the world total zinc consumption in 2019.

Source: SMM

Zinc consumption in Europe accounted for about 17% of the world total, propelled by its automotive industry. Automakers including Volvo, Nissan, Ford and Daimler have shuttered a total of more than 70 plants in Europe as authorities enacted measures to contain the fast-spreading coronavirus.

Germany, Belgium and Italy, who have high numbers of infections, are the top three zinc consumers in Europe, and their combined volume accounted for almost half of the continent’s total and 7.44% of the world’s total in 2019.

Zinc consumers in Europe rely heavily on imports, which are likely to dwindle significantly in the short term, leading to inventory accumulation at their suppliers and tightening cash flow across the zinc industry.

Source: SMM

The virus has not had great impact on zinc consumption in America, as limited factories in the US, which accounts for more than half of zinc consumption in the continent, were closed even after President Donald Trump declared national emergency last Friday.

Source: SMM