Viewpoint: Global zinc supply set to surge in 2020

Global refined zinc supply is poised to surge in 2020, outstripping demand in the short-term as consumption falls behind.

Profitable treatment charges to convert zinc concentrates into metal will continue to incentivise smelters to produce next year, adding more supply to the market.

"What is the most obvious thing when you look at zinc? It is the increasing production in China," a trader said. "It is a lot more — we are not talking about a gentle increase. With treatment charges where they are, the smelters turn the tap on and produce more."

Refined zinc production in China rose by 14.2pc on the year to 594,000t in November, while output in January-November rose by 9.9pc to 5.69mn t.

According to the International Lead and Zinc Study Group, global refined zinc production rose by 2.1pc in January-November to 11.18mn t, driven by significant output growth in China. This, with increases in Mexico and Peru, offset production declines in Europe, Australia, Canada, India and Kazakhstan.

Growing supply has further dimmed the market outlook for 2020 and many consumers are not expecting a demand recovery until the second quarter. Several steel galvanisers have delayed deliveries of special high-grade (SHG) zinc from this year to 2020, and they will remain well-covered at least until the first quarter. As a result, spot demand is expected to be low in the coming months.

This year's weak demand has created a surplus of zinc for many consumers, many of which have decided to finalise 2020 supply contract negotiations in January, as there is no pressing need for material.

Contracted volumes for 2020 are expected to fall because consumers are likely to have lower raw material requirements in the face of emptier order books.

"Everyone is worried — they do not have a good outlook for their order books. Consumers will stay conservative and will not book the usual contractual volume," one trader said.

Some contracts for small 2020 volumes were concluded at $120/t on an fca basis in December, but most consumers are preferring to wait until next year before finalising 2020 contracts. The premium of $120/t fca in Europe next year is $20/t below the benchmark of $140/t fca Rotterdam for 2019.

Argus' spot premium for SHG zinc in Europe fell to a six-year low of $40-80/t in-warehouse Rotterdam on 25 November and has remained at that level since, as weak demand and persistent backwardation on the London Metal Exchange (LME) pressured the market.

The three-month LME zinc contract started 2019 at $2,396/t and peaked at $2,949/t on 1 April, before falling to $2,306.50/t on 30 December.

By Yoke Wong