Top Trends That Will Affect Zinc in 2023

How did zinc prices perform in 2022?

Prices kicked off the year trading at above US$3,500 per metric ton (MT) following a 2021 that saw zinc reach a 14 year high on the back of the energy crisis. But prices still had room to grow as the unforeseen break out of the Russia-Ukraine war pushed zinc to a new all time high.

Unsurprisingly, the biggest event in 2022 was the war, which was not something Wood Mackenzie had factored into its forecasts, principal analyst Jonathan Leng told INN.

“The year started with pretty high electricity prices in Europe, but the war saw prices climb to unprecedented levels,” he said.

Wood Mackenzie expected the concentrate market surplus to rise this year, but the smelter suspensions were a catalyst for it to grow further. As a result, Chinese spot treatment charges jumped up by almost US$200 per MT.

“With electrolytic zinc smelting being the most energy intensive non-ferrous metal refining process after aluminum, this squeezed the margins of smelters and triggered suspensions,” Leng said. “It has also acted as a drag on the global economy and directly affected most European economies, pulling down demand for zinc.”

Speaking with INN about zinc’s performance in 2022, Helen O’Cleary of CRU Group said zinc’s price performed better than expected on the back of widespread supply disruption.

“But inflationary pressures and US dollar strength have taken their toll in recent months,” she said.

Leng expected prices to increase in 2022 based on the fundamentals of both the low level of exchange stocks and a large metal market deficit.

“We hadn’t expected such a marked deterioration in the macroeconomic environment, which caused the softening of zinc prices in the second half of the year,” he said. “At over US$3,000 it is still quite a high price and the metal market remains tight.”

What is the zinc supply and demand forecast for 2023?

When looking at what might be ahead in 2023, what happens in top producing country China remains a key factor to pay attention to.

While macroeconomic indicators for many of the world’s major economies have continued to deteriorate, for Leng they are not signaling a synchronized global economic downturn.

“The Chinese economy is expected to gain some momentum in 2023,” he said. “The easing of the zero-COVID policy will give the domestic economy a much-needed boost, but a major effort to stimulate the country’s ailing real-estate sector will not happen.”

Nevertheless, the easing of COVID-19 restrictions and the gradual return of confidence should see Chinese demand rebound and grow by just under 1.5 percent in 2023 after falling by almost 2 percent in 2022, according to Wood Mackenzie data.

CRU is also forecasting a rebound in Chinese demand next year of 3 percent year-on-year, following this year’s 4.3 percent contraction.

Elsewhere in the world, the outlook is more mixed.

“Demand in Europe is projected to contract for a second consecutive year, while in the US a stalling of growth in the second half of 2023 will see a modest contraction in its demand,” Leng said. “However, the recovery of China and the resilience of demand from countries such as India will help return global consumption to growth after it fell in 2022.”

For its part, CRU sees overall demand outside of China rising 1.8 percent year-on-year after this year’s 2.9 percent contraction.

Although the risks to the outlook are weighted to the downside, there is also some room for cautious optimism, Leng pointed out.

“For example, inflationary pressures are showing signs of easing, energy prices are falling and these together with the reduction of supply-chain constraints, it is possible that the slowdown in Europe and other parts of the world may prove less severe than expected,” he said.

In terms of supply, Wood Mackenzie expects reasonably strong growth in mine output next year as several new mines commissioned this year ramp up, plus higher output from a few existing mines.

“Nearly all of the new projects starting up this year were delayed with issues ranging from COVID-related disruption of contractors involved in construction to metallurgical problems and geopolitical issues,” Leng said. For example, Aripuana in Brazil, the Neves Corvo expansion in Portugal and Zhairem in Kazakhstan were all delayed for different reasons.

CRU also expects global mine supply to recover most of this year’s losses in 2023, with growth of 1.7 percent following this year’s 1.9 percent contraction.

But as the new year begins, uncertainty remains on the zinc smelters front.

“Power prices have eased as European governments have made preparations, including filling gas storage capacity for winter, but there is likely to be further volatility,” Leng said.

In recent months, Nyrstar’s (EBR:NYR) Auby smelter in France was placed on care and maintenance, while its Budel smelter partially resumed production in November.

“There is potential for a few other higher cost smelters to follow suit and suspend production over the winter, especially if government support dries up,” Leng said. “But forecast higher contract (treatment charges) and contract metal premiums next year should boost profitability.”

With almost 450,000 MT per year of smelter capacity currently idled in Europe, CRU expects energy-price-related disruption to continue throughout next year.

“Smelter disruption will also remain a theme in North America and Australia,” O’Cleary said. “Smelter closures in Europe will continue next year and some could become permanent.”

All in all, CRU is forecasting a refined deficit of 50,000 MT.

“The biggest risks to our forecast are European smelter output and Chinese demand growth given the recent easing of COVID restrictions has led to an upsurge in cases,” O’Cleary said.

For its part, and despite higher smelter production and muted demand growth, Wood Mackenzie is forecasting a refined market deficit in 2023. However, at around 160,000 MT, it is much smaller than in 2022.

The firm also forecasts a large concentrate market surplus of 350,000 MT zinc in concentrate.

“This is mainly due to increased mine supply with several new mines commissioned this year ramping-up, plus higher output from a few existing mines,” Leng said.

What factors will move the zinc market in 2023?

Looking at how prices could perform in 2023, CRU expects zinc’s price to fall in 2023 on a less tight refined market and surplus concentrate market. Meanwhile, Wood Mackenzie is forecasting zinc prices to average around US$3,100 in 2023.

“Although the economic outlook has deteriorated in the latter half of (2022), we see fundamental support from the historically low level of exchange stocks, continued constraint on smelter production, combined with modest growth in demand,” Leng said.

Similar to 2022, the main factor investors should watch in 2023 is smelter performance.

“In Europe, the big question is whether there will be more suspensions and conversely, when suspended plants will resume production,” Leng said. “Globally, a major influence on the metal market will be whether the smelters with operating issues this year can get these fixed.”

In terms of projects to watch, Leng highlighted Ozernoye in Russia.

“It is by far the largest new project on the horizon and is due to start-up next year,” he said. “But it faces some big challenges, including limited capacity on the trans-Siberian railway, increased complexity in shipment and credit arrangements being a Russian producer (less so for shipments to China) and restricted access to most foreign-made equipment.”

Another potential issue that may upset the zinc concentrate market is a proposal to implement new concentrate quality standards for zinc concentrates imported into China.

“Proposals include more strict limits on arsenic and mercury in concentrate and new limits on chlorine, fluorine and thallium,” Leng said. “This could effectively bar a lot of material currently imported into the country, leading to a huge displacement of material in the global concentrate market. It is unlikely to be implemented next year but this is a possibility and we expect some tightening of import standards in the next few years.”

For O’Cleary, a factor investors should keep an eye out for is fresh China stimulus to counteract the COVID-related slowdown. “This could provide upside in H2,” she said.