DEMAND SIDE ANALYSIS My previous post was a supply side analysis. This post concentrates on demand side analysis.
I have been manufacturing & selling galvanized steel since 1985. Supposedly, I know a bit about the galvanized steel industry. Almost 57% of Zinc is consumed in galvanizing of steel. Auto Industry is the major consumer of galvanized steel followed by Construction Industry.
A year ago, the Auto Industry expected a quick rally after the coronavirus hit and expected to resume normal production by Christmas. Unfortunately, a shortage of chips derailed this scenario. As demand for new cars and SUVs recovered after the lengthy shutdown, it turned out other industries like gaming had been thriving during the enforced lockdown and semiconductor makers had switched production to meet the demand of these new customers. Auto manufacturers charged high prices and made huge profits on vehicles they had in inventory thereby depleting their inventories. LMC Automotive data shows a total of 1.2 million vehicles were lost from global production in the 1st quarter of 2021 and another 1.73 million vehicles have already been lost in 2nd quarter of 2021 because of shortage of chips. Auto manufacturers are desperate to replenish their inventories. It is expected that, as chip manufacturers slowly switch back production targeted at auto manufacturing, about 940,000 vehicles will be restored back into the inventory (over and above the demand). There is expected to be a huge demand of galvanized steel from Auto Sector in H2 2021 and whole of 2022 since they have to replenish inventories of saleable vehicles above and beyond the regular demand.
To give you an example, I was importing Galvanized Steel Coils in August 2020 @ USD 750 per tonne FOB Indian Port. Due to strong demand (from sectors other than auto manufacturing) today, I am importing the same steel @ 1550 per tonne FOB Indian Port. This is despite the fact that Galvanized Steel demand from the auto sector has yet to pick up.
Even under normal conditions, with the demand of Galvanized Steel picking up starting H2 2021 (depending on supply of chips by semiconductor manufacturers), overall Zinc demand is expected to be higher than normal starting H2 2021. If US Senate passes an infrastructure bill, that will be an icing on the cake.
This demand side analysis reinforces my confidence and, therefore, I can once again say with 90% confidence that the Zinc price will actually peak anywhere between $3,600 and $3,800 per tonne in H2 2021.
IMHO