- Zinc prices are already up by 50% this year and more growth is expected.
- Mine closures and limited mine openings create a supply gap.
- The World Bank estimates tight zinc markets for the foreseeable future.
Zinc is the fourth most used metal in the world. It is mostly used for steel galvanization – the process of corrosion-resistant zinc plating. Other uses include alloys such as brass, and dietary supplements.
The metal is typically mined in combination with copper, and similarly to copper, the main investing thesis behind zinc is that it is entering a supply deficit phase due to mine closures and increased demand.
This article is going to provide an overview of and outlook for the zinc market, an elaboration of the investment thesis and analysis of investment opportunities.
Zinc Market Overview
Due to global urbanization and development, zinc production has increased by 55% since 2000 and demand for the metal is expected to continue growing by a rate of 4% per annum. This constant demand growth is creating a zinc market deficit due to the fact that current zinc production cannot keep up with demand.
According to the International Lead and Zinc study group (ILZSG), mine production in 2016 is going to fall by 1.4%, total metal production that includes recycling will increase by 0.5%, while demand is expected to increase by 3.5%.
Figure 1: Zinc is in a strong supply deficit. Source: ILZSG.
Supply was already lowered in 2015 as MMG removed about 350,000 tons of zinc from the market by closing its Century mine that was Australia’s largest open-cut zinc mine, and Vedanta Resources removed an average of 300,000 tons of zinc concentrate annually by closing its Lisheen mine in Ireland. Glencore has also cut back its zinc production by one third—or 500,000 tons—due to its high production costs.
As total mine production is forecasted to be 13,271 thousand tons of zinc in 2016, the closure of the two mines and Glencore’s cutback only removed about 8.5% of the global zinc supply. As there were no major zinc mine openings and there aren’t any in sight as it takes an average 15 years to develop a zinc mine, this resulted in a huge spike in zinc prices since the beginning of the year and lower London Metal Exchange (LME) zinc inventories.
Figure 2: Zinc prices and LME inventories. Source: World Bank.
As zinc moved into a supply deficit, LME inventories started to decline, and as supply got tight, prices shot up.
Figure 3: Zinc prices in the last 12 months. Source: Witco.
The above represents an increase of 40% since December 2015 lows, but the outlook and average historical prices (figure 2) show that there is still plenty of room to grow.
The outlook for zinc is very positive from both independent and zinc dependent sources. ILZSG expects a further deepening of the zinc supply gap in 2016, and Teck Resources expects a continuation of the zinc supply deficit for at least 5 years.
Figure 4: Expected zinc supply deficit up to 2020. Source: Teck.
This is in accordance with the Word Bank and the International Monetary Fund expectations related to zinc prices.
Figure 5: Expected zinc prices per ton. Source: World Bank.
The World Bank’s expected steady increase in zinc prices shows that there is a structural trend developing in the zinc market. But this doesn’t mean that the price will develop exactly like above. Short term periods of market tightening can result in large price increases, while risks like slower economic growth in China can negatively affect the price.
Figure 6: China is the biggest consumer of zinc. Source: ILZSG.
As the situation in global zinc markets is pretty straight forward and positive, an issue with zinc arises from the fact that it is difficult to find pure zinc investments as zinc is often a by-product in mining and mining corporations usually have other main resources. But a good alternative is the PowerShares DB Base Metals Fund that has a 33% exposure to zinc, with the remaining two thirds exposed to copper and aluminum. The copper exposure is also good as copper is expected to enter into a supply deficit by 2018.
For direct zinc stock exposure the important thing is to calculate the revenue percentage deriving from zinc in a company, assess the future outlook for other metals, and to see if production costs are below the cost curve.
Figure 7: Zinc cost curve. Source: Teck Resources.
Low production costs enable a company to weather price declines and add extra profits when the cycle turns.
The conclusion is simple: zinc is going into a huge supply gap if global economic conditions stay stable. Most risks are related to the continuation of growth in China but this can be offset by India as it is entering a phase of high urbanization and infrastructure investments.
In relation to zinc investments, pure zinc miners can be found on the Canadian stock exchanges but as those are mostly young miners, their risks are not only related to zinc prices but also to the quality of their development projects and execution capacities. With more established miners the issue lies in their portfolio diversification. The best opportunities are to invest in ETFs with exposure to zinc.