Zinc’s Supply & Demand Equation Not Simple Math

May 06, 2015

As the year works through its second quarter, there appear to be hopes 2015 will be a good year for zinc. Or not.

 

When it comes to zinc, over the past three years, mine production, metal production and metal usage have all risen.

 

Global Mine Production, Metal Production and Usage – 2014 ('000 Tonnes)

Global Mine Production Metal Prod

Source: International Lead and Zinc Study Group

 

In terms of mine production, China remains the world’s largest zinc producer. It is also both the world’s largest consumer and its largest refiner of the metal.

 

Global Mine Production – 2014

Global Mine Production 2014

Source: International Lead and Zinc Study Group

 

 

 

 

While zinc mine production in a number of countries has been falling over the years, in China it has been rising steeply.

 

Global Zinc Mine Production – 2010/15 ('000 Tonnes)

Global Zinc Mine Production

2010 2011 2012 2013 2014
China 3,700 4,050 4,540 4,730 5,028
Other Countries 1,562 1,576 1,556 1,560 1,581
Australia 1,458 1,472 1,533 1,524 1,485
Peru 1,470 1,256 1,281 1,351 1,319
Europe 993 988 977 976 1,015
United States 751 769 739 777 821
India 740 796 758 793 706
Mexico 570 632 660 643 677
Kazakhstan 454 429 84 417 386
Canada 649 623 641 419 353
World Total 12,346 12,590 12,770 13,190 13,372

Source: International Lead and Zinc Study Group

 

Chinese consumption has also risen, as it has, for the most part, elsewhere around the world.

 

Global Zinc Consumption – 2010/15 ('000 Tonnes)

Global Zinc Consumption

Source: International Lead and Zinc Study Group

 

 

 

 

Individual Zinc-Producing Countries

China

The country’s major zinc-producing provinces are Guangxi, Hunan, Inner Mongolia and Yunnan.

Australia

In northwest Queensland, the Century mine, operated by MMG Limited, is currently one of the largest zinc-producing mines in the world. Other mines in Australia include Glencore’s McArthur River mine in the Northern Territory and its Mount Isa mine, also in northwest Queensland.

Peru

Most of Peru’s zinc is mined in the Andean Ancash region in the north of the country.

US

Currently, the largest mining operation in the country is the Red Dog mine in Alaska, a joint venture between Teck and NANA Regional Corp.—an Alaska Native Regional corporation formed in 1971 under the Alaska Native Land Claims Settlement Act. (The mine accounts for the majority of the country’s zinc mine production.) Nyrstar’s East Tennessee Zinc Complex in Jefferson and Knox counties is the country’s second-largest zinc-producing operation.

India

Alongside the Red Dog mine in Alaska, the Rampura-Agucha mine, located in the Bhilwara district of Rajasthan in India, is one of the largest sources of zinc in the world. The mine is owned and operated by Hindustan Zinc, majority owned by Vedanta Resources and the Indian government.

Mexico

Chihuahua and Durango in the north, Guerrero in the south and Zacatecas in the center, are Mexico’s largest zinc-producing states, with the country’s largest zinc mine located near the international border on the Chihuahua side of the Sierra Madre Occidental.

Kazakhstan

The largest zinc mining operation in Kazakhstan is that of Kazzinc, owned by Glencore. The company’s main zinc operations are in the East-Kazakhstan region of the country, with the Maleevsky mine in the Zyrianovsk complex and the Tishinsky mine in the Ridder complex accounting for the majority of the company’s mine output.

Canada

Mines producing zinc in Canada are to be found in British Columbia, Manitoba, the Northwest Territories, Nunavut, Ontario, Quebec, Saskatchewan and Yukon.

Ireland

The country’s two zinc mines are the Tara mine at Navan, Europe’s largest zinc mine, and the Lisheen mine in County Tipperary.

It is worth noting that, although its zinc production is broken out in U.S. Geological Survey figures, but not in those of the International Lead and Zinc Study Group, Bolivia is also a sizable producer of zinc. The leading zinc-producing mine is the San Cristóbal mine, in Potosí Department in southwestern Bolivia, operated by Sumitomo.

 

 

 

 

Zinc End Uses

According to the International Zinc Association, the major use of zinc is for galvanizing, i.e., protecting steel from corrosion. Other significant uses include that in brass and bronze and in zinc-based alloys used in the die-casting industry.

 

Major Zinc End Uses

Major Zinc End Uses

Source: International Zinc Association

 

The Zinc Miners

At BMO’s 2015 Global Metals & Mining conference at the end of February this year, Nystar gave a presentation that included—using figures sourced from Wood Mackenzie’s global zinc long-term outlook Q4 2014 and Nystar itself—charts of the five-largest zinc smelting companies and five-largest zinc mining companies.

 

Five Largest Zinc Mining Companies ('000 Tonnes)

Five Largest Zinc Mining Companies

Source: Nyrstar

Five Largest Zinc Smelting Companies ('000 Tonnes)

Five Largest Zinc Smelting Companies

Source: Nyrstar

 

 

 

Decreasing Supply and Increasing Demand?

While mine production in Australia, Canada, India, Kazakhstan, Namibia (at Vedanta’s Skorpion mine) and Peru decreased in 2014, this decrease was more than offset by the increase in production in China. The case was the same with China’s refined zinc metal output, which more than offset reductions in such output elsewhere around the globe.

 

Global Refined Zinc Production – 2010/15 ('000 Tonnes)

Global Refined Zinc Production

Source: International Lead and Zinc Study Group

 

Going forward, however, it is far from certain that, after this year, global production growth will offset consumption growth.

Indeed, according to a number of projections, it will not. As they have been over a number of years now, mines continue either to close or reduce output. From 2016 on out, sufficient new production capacity to offset the loss of output from these seems unlikely for some years. And with what new projects there are in the pipeline, there is also concern that their deposits may consist of lower-grade ores.

Given the level of zinc prices over the last several years, there has been little incentive, or sense of urgency, for investment in new mining capacity.

The forthcoming projected closure this year of MMG Limited’s (MMG) Century mine in Australia perhaps illustrates this. Currently the world’s third largest, with an annual production capacity of some 500,000 tonnes, the zinc mine accounts for around 4 percent of global zinc output. However, it appears that, even now, despite much effort, MMG remains no closer to finding a replacement for the mine.

And in a recent report, Reuters noted that, having put things on hold back in 2013, the company “plans to decide by September how it plans to develop its Dugald River zinc project, key to replacing output from its Century mine.”

Century is, however, not the only large mine slated to close soon. Vedanta’s Lisheen mine, Europe’s second-largest zinc mine, is also expected to close soon (October of this year) with, according to Bloomberg Intelligence, amounting to a cut in supply of 175,000 tons.

Add this lost production to 335,000 tons eliminated when Canada’s Brunswick and Perseverance mines were both closed in 2013 and that’s quite a significant amount of production. On top of these eliminations, Vedanta’s Skorpion mine in Namibia is reaching the end of its life, and the next several years could, in addition, see reduced production not only at both Red Dog and Rampura-Agucha, but also perhaps at Mount Isa.

Indeed, according to Morgan Stanley, by 2017, annual mined supply will have had 1.2 million tons taken out of production.

On the other hand, who really knows just how much and for how long producers will attempt to eke out production from lower-grade ore or even ostensibly tapped-out resources.

 

 

 

Increasing Demand

According to the International Lead and Zinc Study Group, in 2014, global usage of refined zinc exceeded output by some 296,000 tonnes, with Bloomberg Intelligence believing it could rise to 1.98 million tonnes by 2017.

In 2014, while world refined zinc consumption rose 6.5 percent, China, which accounted for some 46.5 percent of total refined zinc consumption, increased its apparent consumption by 11.7 percent.

Depending on who you ask, there are, as so often, different answers to just how zinc is used in China.

 

China Zinc Demand 2014 (Teck)

China Zinc Demand 2014

Chinese end use 2014 (Nyrstar)

Chinese end use 2014

But what is really important is that, for the next several years anyway, despite continuing demand growth ex-China, the country is expected to remain the driving force behind global zinc consumption. (The Australian Government projects China’s zinc consumption as increasing by 5 percent a year to 8.5 million tons in 2020.)

Growth in consumption, particularly in the emerging market countries, is expected to be powered by the increased utilization of galvanized steel in both automobiles and infrastructure.

 

 

 

The Prospects For Zinc

When looking at where zinc will go from here, the three big unknowns have to be: first, the effect China’s slowing growth will have on zinc demand, if both the country’s steel production and the demand for the steel it produces decrease drastically—especially since the greatest use for zinc globally is for galvanizing.

Second, there is China’s ability, in the face of any tightening in supply and/or rise in prices, both to increase mine and refined zinc production. On the basis of last year’s figures (and those for the first few months of this year), the country’s ability historically to increase mine and refined zinc production appears proven. (What the limits are to either or both, however, appears less obvious.)

And third, not only just how all the various differentials between the U.S. dollar and other relevant currencies (especially the Australian dollar) continue to morph, but also the effects they have on any decisions by producers to cease and/or reduce production—or not.

The big question, surely, remains: Over what period of time are we going to see all this narrative played out—however it ends? 2015? Probably not; perhaps, rather, 2016/17.

A Word Of Caution

Extreme care should be exercised when trying to draw conclusions about supply and demand from the changing levels of LME zinc stocks.

The U.S. Geological Survey had this to say in their report Zinc In December 2014, published in March: “In February, the LME approved two additional warehouses in New Orleans, LA, for metal delivery. The warehouses were owned by Whelan Metals LLC, a subsidiary of warehousing and distribution company W.F. Whelan Co. (Canton, MI). The listing coincided with the cancellation of warrants for 90,000 t of zinc in New Orleans-based LME warehouses, the majority of which were operated by Pacorini Metals AG, a subsidiary of Glencore. News reports speculated that the material may have been bound for Whelan’s new warehouses to be made available for consumers, as the difference between the futures price of zinc and the cash price has recently narrowed, making financing deals for the metal less attractive to investors.”

As always, there is more to changes in LME warehouse stocks than immediately meets the eye.

 


Find your next ETF

Reset All