Zinc Supply to Rebound?
Updated: Nov 20, 2019
The sharp slide in the zinc cash-to-three month price spread flags a market quickly moving from backwardation to contango and positioning for much more relaxed supply conditions. Visible zinc stockpiles are closing in on historical low levels suggesting investors are taking a big punt that the declining inventory trend has come to an end.
The key hook is the strong rally in zinc treatment charges over the past 12 months flagging a much more profitable environment for refined zinc production. The biggest influence of this outcome will come from China, which now produces 44% of global refined zinc up from 22% in 2000.
The rub is that China’s zinc production has been relatively inelastic this year rising a lower than expected 2.5% for the first eight months of 2019. All eyes will be on China’s September production numbers. If levels don’t show a marked improvement on August the shape of zinc futures curve will need to move higher and sharply back into backwardation to reflect still very tight current supply conditions.