Domestic Zinc Ore Supply Will Be Tight Throughout 2022,...

Domestic Zinc Ore Supply Will Be Tight Throughout 2022, Underpinning Zinc Prices_SMM | Shanghai Non ferrous Metals

Domestic Zinc Ore Supply Will Be Tight Throughout 2022, Underpinning Zinc Prices

Jun 15, 2022 13:24CST

Source:SMM

The domestic zinc ore supply will be tight throughout this year. Due to the labour shortage overseas and the impact of domestic mine accidents and environmental protection policies, SMM has lowered its forecast for the increase in global zinc ore supply in 2022...

SHANGHAI, Jun 15 (SMM) - On the macro front, the market shall continue to closely watch the pace at which the US Federal Reserve hikes its interest rates and scales back its balance sheet this month. Previously, the market had anticipated that the US Fed would raise interest rates by 50 basis points each in June and July, and start the process of shrinking the balance sheet. It remains to be seen whether US Fed officials will make speeches that are more hawkish than expected under the circumstance of high inflation and positive economic data, which will become the biggest uncertainty overseas in the short term.

On the fundamentals, the European electricity prices are currently in the range of EUR 150-230/MWh, which are based on the electricity prices in France, the Netherlands and Belgium where Trafigura's smelters are located. Based on zinc ore TCs of $200/dmt, European smelters are now struggling around the break-even point. However, they reap substantial profits when European premiums are factored in. The impact of energy shortages will deepen in September-October when winter comes in Europe. If Russia and Europe fail to reach an agreement and Russia imposes greater energy sanctions on Europe, the European energy crisis will be re-triggered. LME zinc inventory saw a slight increase recently due to the delivery of Chinese zinc ingots in Kaohsiung and other regions. It remains to be seen whether the overseas market is able to fully digest zinc ingots expected from China so as to keep LME zinc inventories at a low level. LME zinc prices are expected to fluctuate at a high level.

The domestic zinc ore supply will be tight throughout this year. Due to the labour shortage overseas and the impact of domestic mine accidents and environmental protection policies, SMM has lowered its forecast for the increase in global zinc ore supply in 2022 from 495,000 mt in metal content at the beginning of the year to 235,000 mt in metal content. Zinc ore TCs extended its downward trend into June, and zinc ore shortages have already forced some smelters to lower their production. After taking into account the routine maintenance, SMM predicts that China's refined zinc output will increase merely 150,000-160,000 mt this year. Tight zinc ore supply will provide solid cost support to zinc prices. Since late May, China has introduced a series of stimulus policies that target infrastructure, real estate, automobile and other end sectors, boosting market confidence. Although the consumption is still relatively weak at the moment, SMM is optimistic about future consumption. The upside room of zinc prices will depend on how strong the recovery of consumption will be. The SHFE/LME zinc price ratio is expected to go up. The import window of zinc ore may re-open in Q3. If the domestic consumption performs well, spot premiums will expand and backwardation structure will re-appear under low inventories. Imported zinc ingots may enter the Chinese market in the fourth season.

Nevertheless, the market should also be alert to potential risks, such as production resumption of overseas smelters, increase in LME zinc inventory, and weaker-than-expected recovery of domestic consumption.

cheers.