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High zinc prices could drive substitution

Jan 09, 2018 | 03:07 PM | London | Julian Luk

Tags  zinc, zinc alloys, Glencore, ArcelorMittal, International Zinc Association, EV, galvanizing

High zinc prices could eventually lead to an irreversible dent in consumption of the metal, specifically in the form of zinc alloys in electric vehicles (EVs), market participants told Metal Bulletin.

Substitution out of zinc is likeliest in the alloys sector, a zinc producer told Metal Bulletin, estimating that up to 3-5% of metal usage at current levels could be at risk - albeit over a matter of years rather than in the immediate term.

Zinc alloys are ideally suited for use in complex car parts such as camera, radar and connector housings. These parts can be produced quickly and consistently using zinc but are heavier than their aluminium-based counterparts.

A growing number of EV makers are experimenting with increased loadings of aluminium alloys due to their lighter weight and fuel-saving properties, a representative from a second zinc producer said. 

The EV market is booming. China, the world’s largest EV market - it accounted for roughly half the 753,000 plug-in electric vehicles sold in 2016 - aims to have at least 5 million electric vehicles on Chinese roads by 2020, according to Industrial Minerals’ Martim Facada.

The first electric vehicle from Germany’s Volkswagen will hit the Chinese market this year - it has the goal of cumulative production of 1 million electric vehicles by 2025. Meanwhile, US automaker Ford has said 70% of its sales in China will be of electric vehicles by 2025, and Volvo has said every car it produces from 2019 will have an electric motor.

Mercedes plans to offer an electric version of every model it sells by 2022, BMW intends to have 12 fully electric models in production by 2025, and Nissan has said electric vehicles will account for 20% of its European sales by 2020.

The governments of the United Kingdom, France and India also have set out plans to eliminate fossil-fueled vehicles. To keep vehicle weights and production costs low, aluminium alloys may win out over zinc in the years to come.

“The most imminent threat to zinc is the growing usage of aluminium alloys in EVs. The EV is a trend of no return,” the second zinc representative said. “When it happens, there will mean a big shift [toward aluminium alloys]. But we have not seen that yet as automakers’ procurements normally take a couple of years.”

The London Metal Exchange's three-month zinc contract hit a 10-year peak of $3,324 per tonne on Friday December 29, the last trading day of 2017, surpassing the previous 10-year high of $3,316 per tonne on November 1. The price had climbed further, to $3,356 per tonne, by Friday January 5.

“If zinc prices surge to above $3,500 per tonne, we will see a drop in consumption,“ an executive at a third major zinc producer told Metal Bulletin.

“If there’s an opportunity created by the zinc price being too expensive, people will just go for other materials,” he added. “And they are not coming back. Why would they?”

Eight out of 11 analysts surveyed by Bloomberg late last year said they expected further price gains for zinc in 2018 due to a lack of supply and growing demand.

The average LME zinc price in 2017 was about $2,863 per tonne, up 48% from the average price of $1,939 per tonne in 2015, according to Metal Bulletin Research analyst William Adams, who expects it to average $3,038 per tonne over the next year. The most bullish prediction for 2018 among those surveyed by Bloomberg was for an average price of $3,854 per tonne.

“[High] zinc prices are already weighing on zinc consumption... we have heard of substitutes coming in,” a source at another major zinc miner said.

The news that Glencore, the world’s largest zinc producer, will restart production at its Lady Loretta mine in Australia failed to slow the price rally after the scale of the ramp-up proved smaller than expected

Expectations of a supply deficit in 2018 have also buoyed prices. The International Lead & Zinc Study Group forecast a 223,000-tonne zinc deficit for the year.

Limited room for zinc replacement in other sectors
Large-scale substitution of zinc is unlikely in other sectors, however, including galvanizing, which accounts for more than 60% of global zinc consumption, according to the International Zinc Association.

Some galvanizers are adding aluminium to the zinc bath. ArcelorMittal, for example, produces Galfan, an alloy coating produced by soaking steel in a bath of molten metal made up of around 95% zinc and 5% aluminium.

“[But] zinc is irreplaceable in the galvanizing process. There is almost negligible substitution of zinc in the sector,” a source at a European galvanizer said. “More equipment is required, and it’s more challenging to control the atmosphere. It doesn’t save you much money.”

“For zinc to be replaced in galvanizing, it would require a lot of research work that could possibly take five to 10 years,” an official at an Asia-based zinc producer said.

Chemical forms of zinc - mainly zinc oxide, which is used in rubber tires, breakfast cereals and pharmaceutical products - “is not replaceable,” an official at a fourth zinc producer said.


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