SMM: Will Zinc Be the Nonferrous Metal with Best Trading Opportunity in the Second Half with Constant Short Supply?

SHANGHAI, Jul 8 (SMM) - SMM believes that the brief opening of the import window gave smelters the opportunity to restock zinc ore for the third quarter. However, due to the changing SHFE/LME price ratio and financial pressures as well as other issues, the smelters restocked only for the third quarter. And the restocking for the fourth quarter still awaits the opening of import window in the third. Therefore, this year, the domestic ore market will maintain a tight balance. And the consumption side will be subject to the recovery of terminal players following the introduction of stimulus packages.

How is the overseas market running?

Overseas zinc concentrate supply could hardly see an increase in 2022

In 2022, overall zinc concentrate increment has been less than expected overseas due to issues such as pit closures, labour shortages, extreme weather and declining zinc ingot grades. SMM lowered its previous forecast for overseas zinc concentrate increment from an original value of 216,000 mt to -11,200 mt, meaning that zinc concentrate production is expected to decrease by 11.2 million mt compared to 2021.

Production resumption by smelters is unlikely in the near term

The comprehensive European electricity prices (based on the prices in France, the Netherlands and Belgium, where Trafigura's smelters are located) have recently risen significantly and are now at the level of €300/MWh. However, the impact of higher electricity prices has been mitigated by the weakening of the euro against the US dollar, while higher sulphur acid prices have also brought additional profits to the smelters. Based on the TCs of US$200/dmt, the break-even point for European smelters is around $3,600/mt.

After the fall in zinc prices, smelters’ profits have been squeezed, which even suffered losses. It should also be noted that the rapid rise in electricity prices in Europe and the problems brought on by energy remain unresolved and the likelihood of resumption of production is small in the near term.

China zinc ingot exports are delivered to warehouses in Kaohsiung, Taiwan, evidenced by rising inventory

The early production reduction and shutdown of European smelters triggered a local supply shortage, and in April, LME stocks in Southeast Asia were transferred to the Europe to ease the shortage and supply the long-term orders.

Since October 2021, when European smelters started to reduce the production, the local premiums moved all the way up to a high of $500/mt. According to SMM, the high premiums in Europe is the result of high selling prices by European smelters in response to high electricity prices, as well as local logistics issues, and such high level of premiums is not very sensitive to consumption changes.

When it came to June, Chinese exports of zinc ingots were delivered in Kaohsiung, Taiwan, slowing down the de-stocking process of LME stocks. In the longer term, it is expected that domestic zinc ingots will continued to be delivered overseas.

China zinc concentrate market

China zinc concentrate production estimated to rise 3% in 2022, with output growth mainly seen in the second half

In the first quarter of 2022, domestic zinc production fell year-on-year due to the pandemic and restrictions on explosives during the Beijing Winter Olympics.

In the second quarter, with no domestic energy restrictions and policy end regulation, high profits have accelerated the production resumption of domestic mines. Domestic zinc concentrate production in the first half of the year fell 74,300 mt or 4.12% year-on-year. Annual zinc concentrate production is expected to increase by 114,400 mt or 3% year-on-year throughout 2022.

Risk aversion sentiment slowed zinc concentrate purchases, and imports remained low

Risk aversion sentiment has greatly slowed domestic zinc concentrate purchase. In May, the SHFE/LME price ratio surged, and the import window opened briefly. However, smelters restocked only on rigid demand.

According to SMM research, China zinc concentrate imports totalled 1.52 million mt in January-May, down 7.38% YoY.

Zinc concentrate supply fell YoY in the first half, and the social stocks were high historical low

According to SMM research, domestic concentrate supply showed negative growth in the first half of the year, and the social stocks were at a low level for the same period of the previous years.

The brief opening of the import window gave smelters the opportunity to restock zinc concentrate for the third quarter. However, due to the changing SHFE/LME price ratio and financial pressures as well as other issues, the smelters restocked only for the third quarter. And the restocking for the fourth quarter still awaits the opening of import window in the third. Therefore, this year, the domestic concentrate market will maintain a tight balance.

TCs for imported zinc concentrate fell after the brief rally of SHFE/LME price ratio

Based on SMM statistics, TCs for imported zinc concentrate fell after SHFE/LME price ratio rallied briefly, and the zinc concentrate supply remained tight.

China refined zinc market

Zinc concentrate supply shortage hindered the ramp-up of smelting capacity

The first half of the year was featured by a shortage of zinc concentrated, leading to a continuous downward trend in TCs; while the recent decline in zinc prices further squeezed smelters’ profits. Smelters brought forward their maintenance plans or reduced or suspended the production for concentrate supply shortage or losses. Refined zinc production was low in the first half.

Supply in the second half is expected to rise during the release of domestic production and inflows of imports. But the supply tightness will resurface in the fourth quarter amid active restocking for the winter.

The production of refined zinc is estimated at 6.2 million mt throughout 2022, up 114,500 mt or 6.48% YoY.

Commissioning progress of new domestic smelting capacity

According to SMM's statistics on the alloy output of domestic smelters, the alloy output of many top-tier smelters has increased compared to previous years.

As for the new refined zinc production capacity, the total capacity is expected to add 900,000 mt from 2020 to 2023.

Zinc ingots were exported to Europe amid severe import losses

In 2022, refined zinc imports were in constant losses, and the imports are expected to be 2,000-3,000 mt in the third quarter with the closure of import window.

The export window, on the other hand, opened in April, and the ingots were exported in May, and delivered to LME warehouses in June.

Domestic zinc ingot social inventory performed poorly than other metals due to unsmooth exports

According to SMM statistics, as of July 4, SMM zinc ingot social inventory across seven markets in China totaled 174,400 mt, a two-year high.

Due to the early \presence of a large number of reverse arbitrages established when SHFE/LME price ratio was high, the players had to export to mitigate the pressure as the current price ratio is not enough to close these reverse arbitrage positions. Therefore, more exports could be expected in the future, and the reduced stocks in Tianjin in the past two weeks include those for exports.

SMM believes that the players shall watch the sustainability of export business as well as the recovery of consumption.

China zinc consumption

Will the consumption recover in July after it fell short in June?

The consumption side remained poor even in June, and the operating rates of different downstream sectors dropped on a year-on-year basis. As of the end of May 2022, China refined zinc consumption in the first five months dropped 13% YoY.

The market turned optimistic again in July, and the market needs more stimulus policies. But it remains to be seen if these policies will actually revive the consumption, which is also determinant to zinc prices.

Issuance of special bonds accelerated

According to SMM statistics, as of June 23, the country's new special bonds totalled 2,858.8 billion yuan, which are required to be used by the end of August. The new special bonds in June exceeded one trillion yuan, while they are required to be used by the end of August. And these special bonds will be mainly invested into the infrastructure sector.

Price outlook throughout 2022

According to SMM zinc concentrate supply-demand balance, zinc is expected to remain in short supply in the second half of 2022, with some improvement towards the end of the year. SMM believes that zinc will be the non-ferrous metal with the best trading opportunity in the second half of the year.

SMM believes that the brief opening of the import window gave smelters the opportunity to restock zinc ore for the third quarter. However, due to the changing SHFE/LME price ratio and financial pressures as well as other issues, the smelters restocked only for the third quarter. And the restocking for the fourth quarter still awaits the opening of import window in the third. Therefore, this year, the domestic ore market will maintain a tight balance. And the consumption side will be subject to the recovery of terminal players following the introduction of stimulus packages.