Zinc prices stuck between electricity costs and Covid
For a metal whose trade is normally as quiet as a cup of tea, zinc has seen a surprising amount of flash and crash over the past two months.
Between March and May, three-month LME futures traded in a range over $1,000 per metric ton, moved from around $3,600 to a high of $4,896 and back down to 3 $714 today as traders weighed in on whether electricity costs or the spread of Covid in China would play a bigger role in the coming months. From where we sit, the high cost of electricity is not going away, while Covid is likely to come and go in waves.
The electricity problem
Zinc prices began to rise late last year, months before the conflict in Ukraine came to an end, as the cost of electricity in Europe forced some major European producers to shut down temporarily out of production, or, as is known in the industry, to put it into “care and maintenance.”
Europe’s largest zinc producer Nyrstarwhich is owned by commodity trading company Trafigura, closed its zinc refining plants in the Netherlands and Belgium last October and glencore followed suit in November with a zinc sulphide plant in Italy. To make up for the shortfall, Nyrstar increased production in Australia and Glencore maintained its other plants, including production in Kazakhstan, but this nevertheless created a shortage in Europe which normally produces 15% of the world’s total zinc.
Since October, stocks of this metal, used mainly to galvanize steel for construction and infrastructure, have fallen to a historic low. In April alone, LME warehouse stocks fell by more than 40% and are currently at a very low level of 86,800 tons.
Looking at where natural gas prices are going (electricity companies mainly use natural gas or coal to generate electricity), it is clear that the already high electricity prices will only increase, in especially when the weather gets colder. The conflict in Ukraine and the sanctions against Russia only aggravate this situation because Europe is now importing gas from the United States to fill the Russian supply gap.
Covid issues for zinc
The other side of the coin is that while inventories in Europe are falling, zinc inventories in the warehouses of the Shanghai Futures Exchange are piling up. The latest wave of Covid in China has resulted in a lockdown in Shanghai and now also in Beijing, and the longer it lasts the more it slows down infrastructure and construction projects in China, leading to an oversupply situation for zinc.
The situation will change from week to week depending on how Covid continues to spread. Shanghai is just beginning to ease its lockdown restrictions as other parts of the country introduce theirs. Overall, only a relatively small portion of China’s overall zinc production and demand appears to be affected at this time, but there is general caution towards larger projects.
Before the last wave of Covid, China also had problems with energy consumption and carbon emissions from zinc production, albeit on a smaller scale than Europe, and these are likely to continue. even after the Covid issues are resolved.
Taking into account both the electricity and Covid problems, the International Lead and Zinc Study Group forecasts a production-demand deficit of 292,000 t this year, compared to a deficit of 193,000 t in 2021. This means that even if zinc prices could temporarily adjust slightly downwards, the general trend will be in favor of a rise in prices for most of this year.