Market Overview

CRU: Pandering to the China bears: How Much Zinc Supply is too Little


CRU: Pandering to the China bears: How Much Zinc Supply is too Little

PR Newswire

LONDON, Aug. 20, 2018 /PRNewswire/ --

Pandering to the China bears

Global concentrate inventories first reached critical levels in 2017 Q1, leading to Chinese smelter utilisation rates falling below 90% and remaining at depressed levels since. Without much buffer concentrate stock remaining, the relationship between mine supply and Chinese smelter output has continued to strengthen. A key consideration (and uncertainty) for the global concentrate and metal market over the course of this year and next is to what degree Chinese mine supply recovers.

Our base case sees smelter utilisation rates improving from 2018 H2 through the end of 2019 as robust mine supply growth from the rest of the world and modest (3.8% in 2018, and 4.7% in 2019) growth from China supports rising concentrate availability. In this Insight, we stress test the global concentrate (and metal) market against a scenario of falling Chinese mine supply over the next 18 months. In effect, we identify the required shortfall of Chinese (or indeed ex-China) mine supply to affect genuine tightness in global metal markets. While we consider this scenario unlikely, such an outcome (all else being equal) would drive further metal deficits through 2019 as smelter utilisation rates in China would remain below 90%. Such a scenario would see metal stocks fall to levels not seen since the 06/07 price spike.

Chinese mine supply has grown only modestly since 2017

Last year was a difficult one for Chinese mine supply, with CRU's roundup for output at 4.17 Mt (up just 2% year-on-year) despite significant gains in the zinc price. Environmental restrictions left many operations partially idled or shut across the country as inspections took place. With strict environmental enforcement expected to remain in place over the medium term, an increasingly important question with respect to the global concentrate (and metal) market remains to what extent Chinese mine supply can rebound this late in the zinc price cycle. By the zinc price peak in February 2018, Chinese miners had enjoyed nearly 24 months of margin expansion. Despite this, environmental inspections and restrictions have held back mine supply growth. Our roundup of major Chinese operations in 2018 H1 support a mixture of positive and negative growth stories with our estimate for H1 growth up 2% year-on-year. 

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About CRU

CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation by Robert Perlman in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China.

CRU employs over 260 experts and has more than 10 offices around the world, in Europe, the Americas, China, Asia and Australia – our office in Beijing opened in 2004.

When facing critical business decisions, you can rely on our first-hand knowledge to give you a complete view of a commodity market. And you can engage with our experts directly, for the full picture and a personalised response.

CRU – big enough to deliver a high-quality service, small enough to care about all of our customers.

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