SMM: Zinc Market Likely to Remain Tight in H2, Focus on Ore Supply Increase and MoM Consumption Improvement

At the main forum of the 2024 12th Zinc Salt, Zinc Oxide, and Secondary Zinc Raw Materials Trading Forum hosted by SMM, Han Zhen, a senior analyst of lead and zinc at SMM, provided an outlook on zinc price trends for H2. According to SMM balance sheet forecast for China's zinc concentrate and refined zinc, SMM expects domestic zinc concentrate to be in short supply in 2024, with a shortage of around 170,000 mt. Refined zinc is also expected to be in short supply, with a shortage of around 110,000 mt. SMM predicts that the zinc market will remain tight in H2, with a focus on ore supply increase and MoM consumption improvement. Zinc prices are expected to fluctuate at high levels in H2.

Due to the decline in ore grade and extreme weather, the YoY decrease in imported ore from overseas mines was significant in H1 2024.

According to an SMM survey, due to factors such as declining ore grades and extreme weather, the cumulative import volume of zinc concentrate from overseas mines in H1 2024 decreased significantly YoY, with a total of 2.091 million mt from January to July, down by about 22% YoY. Additionally, the benchmark for zinc concentrate in Asia fell to $165/dmt in 2024, supporting expectations of tight ore supply.

Extreme events disrupted H1, limited improvement in zinc concentrate imports expected in H2

Extreme events such as weather and floods disrupted H1, resulting in zinc concentrate imports hitting a three-year low. According to data from the General Administration of Customs, the cumulative import volume of zinc concentrate from January to June was 1.7151 million mt, down 24.71% YoY. However, with the SHFE/LME price ratio recovering, zinc concentrate imports improved. Overall, SMM believes that the improvement in zinc concentrate imports will be limited in H2.

Low shipment volumes at overseas ports

According to data compiled by SMM on zinc ore arrivals and departures at Lianyungang Port, the focus of zinc ore arrivals has shifted downward since 2024, indicating low port inventories. Additionally, weekly zinc concentrate inventories at Lianyungang Port have previously fallen to a four-year low, confirming low shipment volumes at overseas ports.

SMM compiled the zinc concentrate production of major overseas mining companies in H1 2024, totaling around 2.19 million mt, down about 22% YoY compared to H1 2023.

Auxiliary material prices fell in 2023, domestic ore (zinc 50%) cost curve dropped to 13,000 yuan/mt

According to SMM data, since 2023, with the decline in auxiliary material prices, the cost curve for domestic ore (zinc 50%) has dropped to 13,000 yuan/mt (metal content), compared to 13,800 yuan/mt in 2022.

Domestic mines have continued to show a tight supply trend since 2024, with processing fees continuously declining. As processing fees fell and zinc prices rose, domestic mine profits increased rapidly.

Zinc concentrate production fell by 40,000 mt YoY in H1 2024, With Huoshaoyun Mine to be the main growth driver in H2

In H1 2024, domestic zinc concentrate production fell by 40,000 mt YoY due to factors such as declining ore grades, environmental protection, and rectification. SMM expects domestic ore production to increase by around 80,000 mt in 2024, with Huoshaoyun Mine being the main growth driver in H2.

Significant decline in imported zinc concentrate TCs reflects tight future supply expectations

Since 2024, both domestic and imported zinc concentrate TCs have been on a continuous decline. The significant decline in imported zinc concentrate TCs also reflects expectations of tight future zinc concentrate supply. Compared to previous years, the days of raw material inventories at domestic smelters have generally shown a downward trend in 2024, falling below 14 days in July.

With declining TCs, smelters suffered a loss of over 2,500 yuan/mt

Regarding smelters' profits, with the continuous decline in TCs, smelters' profits (excluding by-products) have been severely negative, with a loss exceeding 2,500 yuan/mt after entering August. For imported ore, the profitability of zinc concentrate imports is near break-even.

Raw material shortages gradually realized, refined zinc production may fall to 6.15 million mt in 2024

According to SMM statistics on refined zinc production in H1, the shortage of raw materials has gradually been realized at the smelting end, with some smelters reducing or halting production, resulting in a YoY decrease of 100,000 mt in refined zinc in H1 2024. Due to the continued tight supply of raw materials, smelters' operating rates have also weakened significantly. SMM expects refined zinc production to fall to around 6.15 million mt in 2024.

Smelters' alloy production ratio increases annually

In terms of die-casting zinc alloy, with the continuous release of new capacity, smelters' die-casting zinc alloy production has remained at high levels. However, galvanized sheet consumption has remained weak, forcing smelters to reduce hot-dip galvanized alloy production.

Secondary zinc to be the main growth driver for domestic smelters' new capacity in 2024

In 2024, several companies have planned new secondary zinc capacities, with some mine zinc and secondary zinc capacities expected to be put into production between 2025 and 2026.

Refined zinc imports exceeded expectations in H1, focus on Q4 imports

In H1, domestic supply reductions provided opportunities for imported zinc to flow in, resulting in refined zinc imports exceeding expectations. Long-term import contracts are expected to be maintained in 2024, with a focus on Q4 imports.

Overseas smelters actively resumed production in H1, but production may decline in H2 due to profit compression

In 2024, overseas smelters' power issues were alleviated, leading to active resumption of production. However, the decline in TCs caused smelters' profits to fall slightly. It is expected that refined zinc production may decline in H2 due to profit compression.

End-users: Real estate data performed poorly, the land acquisition turning point has passed, and domestic real estate data is weak. Domestic power grid investment maintained positive YoY growth, but the peak of new photovoltaic installed capacity has passed, with centralized photovoltaic new installed capacity declining YoY, dragging down the growth rate of zinc consumption in the PV field. In infrastructure, cement mills' operating rates recover, and excavator production and sales data improve, but specific efforts need time to be verified. In the automotive sector, although production and sales grow YoY, the growth rate slows down. As NEV penetration gradually increases, it partially replaces traditional fuel vehicles, providing limited support for zinc consumption. In home appliances, recent data shows significant growth in air conditioners among the three major white goods, with export data for the three major white goods significantly exceeding expectations YoY. In 2024, the home appliance sector is looking forward to policy and export efforts.

In 2024, projects such as towers and offshore wind power will support the operation of galvanized structural component enterprises. Although weak real estate performance drags down galvanized pipe operations, projects such as towers and offshore wind power will support the operation of galvanized structural component enterprises.

Improved export orders support high operating rates for galvanized sheets, but weak end-user consumption drags down high operating rates

In H1, due to the high exchange rate, export orders for galvanized sheets remained high. Although improved export orders supported high operating rates for galvanized sheets YoY, weak end-user consumption during the off-season dragged down high operating rates.

Domestic galvanized sheet exports mainly to Southeast Asia, focus on anti-dumping sanctions

According to SMM and General Administration of Customs data, the cumulative net export of galvanized sheets from January to July increased by 16% YoY, with exports mainly to East Asia and Southeast Asia. Attention should be paid to the impact of anti-dumping sanctions in the future.

Die-casting zinc alloy performed mediocrely in H1, focus on Q4 orders

Overall, the die-casting zinc alloy sector performed mediocrely in H1. However, in July, as zinc prices fell, die-casting enterprises' operating rates began to recover, and the decline in zinc prices also stimulated inventory increases in die-casting zinc alloy enterprises. Focus on Q4 downstream orders.

Copper and aluminum substitution for zinc expected to decrease in 2024, focus on stainless steel substitution

In 2024, the substitution of zinc by copper and aluminum is expected to decrease, with a significant increase in the price spread between zinc and stainless steel. Focus on future stainless steel substitution.

Automotive semi-steel tire data performed steadily, supporting zinc oxide enterprises' operations

Zinc oxide operating rates are closely related to zinc slag production and automotive semi-steel tire operations. In 2024, automotive semi-steel tire data performed steadily, supporting zinc oxide enterprises' operations. However, poor orders for ceramic and feed-grade products dragged down zinc oxide operations. Due to comprehensive factors, zinc oxide operations were weak in H1, with weekly operating rates below historical levels.

Weak end-user consumption, domestic and overseas inventories at near three-year highs

In terms of inventories, weak end-user consumption has kept domestic and overseas inventories near three-year highs. Although a turning point in zinc ingot inventories has recently appeared, absolute inventories remain at historical highs. Additionally, the decline in smelter production has significantly reduced refined zinc smelter finished product inventories.

Imported zinc ingots supplement domestic supply reduction, weak consumption limits spot premiums

Domestically, imported zinc ingots have supplemented the reduction in domestic supply, offsetting some of the domestic supply reduction. With weak consumption, domestic spot premiums have struggled to rise. Future improvements in spot premiums will depend on a turning point in consumption.

Overseas, social inventories remain high, indicating weak overseas consumption, with European spot premiums running weakly.

Focus on increased mine supply and MoM consumption improvement in H2

According to SMM's balance sheet forecast for China's zinc concentrate and refined zinc, SMM expects domestic zinc concentrate to be in short supply in 2024, with a shortage of around 170,000 mt. Refined zinc is also expected to be in short supply, with a shortage of around 140,000 mt. SMM predicts that the zinc market will remain tight in H2, with a focus on ore supply increase and MoM consumption improvement. Zinc prices are expected to fluctuate at high levels in H2.