Rising zinc costs likely to squeeze HDG margins

Rising zinc and soaring energy costs will squeeze margins for hot-dip galvanised (HDG) coil manufacturers without a significant demand and price recovery.

European zinc smelters have responded to recent surges in energy costs with production curtailments. Global metals group Nyrstar announced that its Nordic zinc smelter, Budel, will be placed under care and maintenance from 1 September. The company has previously reduced production in response to high energy costs. Swiss-based commodity firm Glencore also placed its Portovesme zinc line in Italy under maintenance in late 2021 amid high energy costs, and the asset has remained off line since.

Prices on the London Metal Exchange jumped following the announcement of the recent curtailments, with the three-month contract closing at $3,797/t on 16 August, up from $2,857/t in the middle of July. Gas prices have also been jumping on constrained supply from Russia. The TTF benchmark was €240/MWh on 18 August, compared with €144.50/MWh at the start of July.

These costs will affect European and Turkish rollers, particularly given low HDG demand and prices. Of the approximate 23,000t of zinc imported by Turkey last year, just over 80pc of this came from European and EU producers. Turkey has imported nearly 10,000t of zinc from Europe so far this year.

The majority of zinc contracts are annual. As much as 80pc of EU steel mill demand is met through annual contracts, although some terms have shortened in recent years. Contracts typically have large volume optionality of plus or minus 10-20pc, and European mills have been taking as little as possible given the low demand from key sectors, such as automotive, and reduced output.

Zinc costs vary depending on mill and supplier. But Argus estimates that on average, if a mill paid about $75/t for a 100g zinc coating on 0.5mm rolled material, with zinc costing $2,857/t at the beginning of July, this would have risen to approximately $100/t based on current prices.

Thus, re-rollers and mills will be forced to try to implement price increases in the coming weeks amid low demand.

Lower HDG demand has continued for several months now amid economic uncertainty and a weak automotive sector. Buyers' reduced purchasing power will do little to revive demand, without which re-rollers will struggle find the market accepting of higher prices. It is more likely that they will find their margins squeezed, boosting the likelihood of further cuts.

By Lizzy Lancaster

Zinc costs per tonne of HDG production