Macquarie Research: Stocks sink zinc – but upside is comingAccording to Macquarie Research:
Zinc
Stocks sink zinc – but upside is coming
Zinc has been carried high and low with the rest of the LME complex this year on the waves of FX moves and China and wider macro sentiment. In early May, LME prices were up 11% compared to the beginning of the year, but by late August it was down over 20%. In September, prices deteriorated further as the potential threat of stocks inflows became a reality. So where next for the galvanizing metal with the bullish mine closures story?
Demand has been lethargic: Approximately 52% of zinc is consumed in the production of galvanised steel and according to data from CRU, the sector has faced a severe pullback in 2015 with slightly negative global growth of -0.91% seen in 1H YoY. The biggest regional reduction in percentage terms was in South America (mainly Brazil) and in the CIS in the second quarter, as Russia’s domestic economic crisis has been compounded by loss of export market share in countries like Turkey, to rival exporters led by China. On the brighter side, in Asia (~50% of total) and RoW (~8%) galvanised steel sheet output was positive in the first half, with growth rates improving in the second quarter. However, despite these more gloomy indicators, analysis of China’s apparent consumption of zinc shows 0.8% growth YT August, despite much weaker net imports (-52% at 179kt) as trade levels normalised after the boom and bust year we saw in 2014 when financing ballooned and collapsed before and after the Qingdao crisis.
On a short-term basis, the stocks inflows have hurt zinc, briefly pushing it back to discount to lead for the first time in over a year. However, with a major chunk of hidden stocks now visible once again, the future threat level has been diminished. The metal market in Asia has also recently tightened, as the re-opened arbitrage window (on firmer SHFE prices) has begun to welcome SHG into China, allowing premiums to rise.
Meanwhile, we inch closer to the closures of Century and Lisheen in 4Q15. With mine production ex-Asia contracting from the peak this year of 7.6Mt, the key Asian miners are China (4.9Mt) and India (0.94Mt). Official Chinese data from CNIA implies a 10.3% reduction in zinc-in-concentrate mine output YT August, to 3.2Mt. While this may exaggerate matters, anecdotal evidence says that mines in South China have been under pressure for some time, for both environmental and economic reasons. However, stalling growth in China is seen being offset this year by a rebound and developmental growth in India, and so it is this region that will allow mine growth to continue to grow even as ex-Asia contracts from 2016.
However despite Asia, or perhaps because of it (due to China’s downstream expansions) we still find the market shifting into a raw materials deficit towards the end of this year after Century and Lisheen bow out. The metal market is already in a structural deficit, which is being addressed by stock draws which currently meet the shortfall. In the future, however, shortages in both metal and concentrates will squeeze the market, and with China less able to respond due to credit and environmental pressures, we believe a strong upside in prices is required to avert the implied dip in metal stocks to less than 1 week of consumption by 2019.