Last hurrah for the zinc price
Zinc hit a four month low of $3,135 a tonne on Thursday, down more than 12% from its decade high achieved mid-February.
Rising fears about trade protectionism have taken the shine off most base metals but zinc's bearish outlook has more to do with new supply; and lots of it.
The metal, mainly used to galvanize steel, has more than doubled since hitting multi-year lows in January 2016 after the shutdown of major mines including Australia's Century, the Lisheen mine in Ireland and top producer Glencore's depleted Brunswick and Perseverance mines in Canada.
Just to throw fuel on the fire the Swiss giant curtailed production at its operating mines in Australia. But in December Glencore said it would restart its Lady Loretta mine while keeping its total output steady at under 1.1m tonnes.
The centre cannot hold – prices are incentivising more mining tonnes in and our supply-demand balances are now pivoting back towards sufficiency and then surplus in the years ahead
More ominously CEO Ivan Glasenberg said the company had about 500kt of zinc capacity that would be restarted at “the right point in the cycle.”
The spectre of fresh tonnage did little to deter zinc bulls who pointed to historically low stockpiles, ultra-low spot treatment charges of just $20/t (paid to refiners by miners and the best indicator of physical market conditions) and the environmental clampdown in China, responsible for a third of global output of roughly 13.2m tonnes last year.
But few expect the zinc market to stand up to the flood of new supply over the next couple of years.
Some 880kt of additional capacity will come on stream in 2018, about two-thirds of it from re-openings and expansions according to the International Lead and Zinc Study Group (ILZSG).
New mines include MMG's Dugald River project in Australia (170ktpa since November for 28 years), Vedanta's Gamsberg mine in South Africa (250ktpa with 30 year life-of-mine) and the Castellanos operation in Cuba (100ktpa for 22 years). The Century mine is also getting a new life and tailings retreatment at the giant mine is enough for an additional 264ktpa.
Further out there is also no shortage of additional supply. Among others, major projects that could be brought into production in the medium term include Arizona Mining's $1.2 billion Hermosa project (95ktpa), Ironbark's $500m Citronen project in Greenland (up to 200ktpa) and the $890m Khnaiguiyah project in Saudi Arabia (80ktpa).
A new report from investment bank Macquarie argues that while the price could revisit recent highs over the next few months, it would be zinc's "last hurrah":
The centre cannot hold – prices are incentivising more mining tonnes in and our supply-demand balances are now pivoting back towards sufficiency and then surplus in the years ahead.
Thus we should expect zinc prices to move lower, and we see an average of $2,850/t in Q4, just under $2,600/t average in 2019, and an eventual journey to around $2,100-2,200/t at the end of the [5-year] outlook period.
Today's price for zinc, used mainly to galvanize steel, compares to an all-time high of $4,580 struck in November 2006. During the depth of the global financial crisis zinc came close to falling into triple digits.