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Zinc Prices Expected to Recover as Pandemic Wanes

By Alejandro Ehrenberg | Wed, 03/25/2020 - 15:15

After copper, Mexico’s most important base metal in terms of production is zinc. As per data released by the International Lead and Zinc Study Group, Mexico was the sixth-largest producer in the world in 2018, accounting for 5 percent of global production that year. The extent to which the COVID-19 outbreak impacts the zinc market is crucial for one of Mexico’s key mining products.

Zinc prices saw a 9.6 percent decrease in 2019, closing the year at US$2,300 per ton. They reached US$2,400 in January 2020, as the US and China signed the Phase One trade deal. However, zinc has plummeted 25 percent since then, currently trading at US$1,820 per ton. Mining.com, commenting on a report released by Fitch Solutions, points to “numerous factory shutdowns in China and quarantines across the globe” as a crucial demand-constraining factor that has resulted in a “significant increase in zinc inventories.”

Nevertheless, it is reasonable to expect that the Asian giant will experience an upturn in industrial activity assuming that the pandemic lets up in China in mid-2020. Demand for steel should then increase, and, as zinc is essential for steel production, its price should recover.

Moreover, as Zacks Investment Research points out, “COVID-19 has led zinc-producers to slow project construction and curb their operations as governments impose restrictions to contain the outbreak. These production cutbacks will lead to a supply crunch, which will drive metal prices when demand picks up. Stimulus measures from governments will also help lift the industry.” Fitch Solutions expects prices to stabilize at US$2,250 per ton in 2020. However, as prices may remain volatile, companies such as Industrias Peñoles, Mexico’s top producer, have taken measures to minimize risks. The Mexican company has fixed and monetized its hedged zinc positions.

Furthermore, charges for processing zinc concentrate are expected to decline. In 2019, the high amount of available concentrate had allowed Chinese processers to ramp their prices up. Nevertheless, Andy Home, in a piece for Reuters, says that “as the spread of the coronavirus chills the zinc supply chain, with a growing number of mines closing or reducing operations” smelters will have little arguments for charging high prices. As a conclusion, Home notes: “This is a key differentiator with the demand shock of 2008-2009. The supply response then took months to materialize: producers gritted their teeth and struggled on. This time many have no choice but to heed their governments’ lockdown orders.”

 

The data used in this article was sourced from:  
Zacks Investment Research, Reuters, Mining.com, Peñoles, Investing News
Photo by:   Wikimedia Commons
Alejandro Ehrenberg Alejandro Ehrenberg Journalist and Industry Analyst

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