April 17, 2024

Zinc Shortage Looms as LME Inventory Hits Lowest Level of the Century

The London Metal Exchange (LME) is currently experiencing low levels of zinc inventory, with only 36,525 tonnes of the metal in its warehouses, the lowest amount this century. A significant portion of this zinc (60%) has already been designated for physical delivery, leaving a smaller amount available for immediate use (15,175 tonnes).

This low inventory is due to a combination of weak demand for zinc, whose usage has fallen by 3.2% in the first ten months of the year, and supply issues, including problems at smelters in Europe. So what is causing the low levels? Let us find out.

Smelter Problems

According to the International Lead and Zinc Study Group (ILZSG), global refined zinc production decreased by 3.2% from January to October this year. This decrease in production occurred in several major producing countries, including China, Kazakhstan, Canada, and Mexico.

However, a considerable impact is in Europe, where smelters faced a significant margin squeeze due to an energy crisis. As a result, Glencore, a multi-national commodity trading and mining company, has shut down its Italy-based Portovesme plant, which handles 100,000 tonnes per year.

Also, it placed its German-based Nordenham smelter (165,000 tonnes per year) on care and maintenance. These production issues, combined with weak demand, have contributed to low levels of zinc inventory at the London Metal Exchange and the Shanghai Futures Exchange.

Changing International Trade Patterns

There shortage of zinc in Europe and the United States is causing high premiums for immediate delivery of the metal. This shortage has led to a shift in zinc trade flows, with China becoming a net exporter of the metal for the first time since 2007.

As a result, China’s zinc exports have increased significantly, with much of it going to Taiwan and other countries, while its imports have decreased. This shift in trade has also resulted in a decrease in zinc stocks in China.

Recovery Rates

Weak demand has impacted Zinc prices in China due to a deteriorated property sector and global supply-chain tightness. Analysts at Citi predict that a recession in Europe will come before a recovery in China, leading to a forecast of steadily declining zinc prices to $2,600 per tonne in Q3 2023 due to a hit on Western demand.

Macquarie Bank also forecasts prices to bottom out at $2,500 in Q2 and remain subdued as the market shifts back to surplus. However, this assumes that the supply side can recover from this year’s underperformance, which is subject to high costs and ongoing power supply issues in Europe.

China’s lifting of restrictions and rising demand may incentivize the country’s smelters to increase production. However, the potential for smelter closures and shifts to permanent closures in Europe remains a concern for the zinc market.

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