The zinc price has been fluctuating so much this year that analysts still cannot agree on where the price is headed.
Commodity researchers from major banks surveyed by Fastmarkets differed by $500 per tonne on their zinc forecast for the second half of 2019 - that is 23.7% of the galvanizing metal's current value.
As of mid-July, the London Metal Exchange's three-month zinc contract was largely unchanged from where it started the year. The contract closed the official session on July 11 at $2,396 per tonne - the same price seen on January 2.
That price also hit a year-to-date high of $2,949 per tonne on April 1 and a year-to-date low of $2,370 on July 9.
Zinc's price volatility stems from its shifting fundamentals and the physical bottlenecks staggering the market's move from acute deficit to expected future oversupply.
And with analysts pointing at different physical market metrics as indicators of future price, questions remain on whether the balance will appear this year or next.
Stocks on the slide
"I don't share the opinion of other market observers that there is enough supply to meet demand," Commerzbank's Daniel Briesmann said on Friday.
Commerzbank forecasts a three-month price of $2,800 per tonne at the end of 2019.
"I don't see production coming back onto the market at current levels, so I think we will see a supply deficit, which has already been recorded for the first months of the year," Briesmann said.
Data compiled by the International Lead & Zinc Study Group (ILZSG) showed a refined zinc metal deficit of 123,000 tonnes from January to May 2019.
This has been supported by a drawdown in visible stocks of the metal. Total zinc stocks across the London, Shanghai and Chicago commodity exchanges have fallen by 12.4% across July, to 157,816 tonnes from 180,202 tonnes.
This, Briesmann said, is reflective of the lack of increased refined output coming into the market despite a higher production of mined metal.
"I don't think that better availability of zinc concentrate will feed through to the refined market, at least not in the time being,” he said.
Treatment charges at four-year highs
New major mines, including Vedanta's Gamsberg and MMG's Dugald River, ramped up to full production toward the end of 2018, while Glencore is continuing to restart its Lady Loretta mine after it suspended production in 2015 due to low prices.
Higher mine output has resulted in a 2.6% - or 123,000-tonne - uptick in refined production, according to ILZSG statistics.
Increased mine output is likely to accelerate smelter production, with Chinese smelters as key swing producers, according to Xiao Fu, the head of commodity market strategy at the Bank of China International (BOCI). She forecast a zinc price average of $2,400 per tonne for the second half of this year and $2,300 per tonne for 2020.
"There are still some smaller smelters subject to environmental checks, but with the zinc ore supply being plentiful and the [treatment charges] being sufficiently high to incentivize production, we think refined zinc output will recover," she said.
Treatment charges (TCs) are discounts to the exchange price paid to smelters for the cost of turning concentrates into refined metal.
At $275 per tonne, Fastmarkets’ zinc spot concentrate TC, cif China, in June was nine times higher than the $30 per tonne assessed last June.This is a considerable boon for smelter revenues.
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Macro headwinds vs weaker dollar
Intessa Sanpaolo economist Daniela Corsini, who forecast the price will average $2,500 per tonne up to the fourth quarter of 2020, remains conscious of potential escalations in the trade war between the United States and China.
Among industrial commodities, zinc is particularly exposed to factors that affect China, the world's largest zinc miner, smelter and consumer.
On July 15, China reported that its gross domestic product grew by 6.2% in the second quarter of the year, the slowest growth since 1992.
"The key risks weighing on the sector are related to macroeconomic and political factors, which could prevail over the good fundamentals," Corsini said, adding that expectations of higher supply have already been priced into the market.
While macro worries continue to cast a shadow over commodity prices, a potential devaluation of the dollar could provide a boost to base metals including zinc, BOCI's Fu said.
The US Federal Reserve is signaling cuts to interest rates in line with the Trump administration's preference for a weaker dollar in order to encourage exports.
"You can argue that with the trade dispute and global synchronized slowdown, the demand aspect won't be very rosy. But at the same time, the competitive devaluation of currencies around the world means commodities will still be seeing a store of value to some extent, that's why I'm not expecting a huge drop in prices," Fu said.
Demand linked to troubled auto industry
Another factor that remains at play is demand. Zinc is heavily tied to the galvanizing of auto parts and chassis, and has likely been affected by a difficult year in the automotive industry.
Predictions for Chinese automotive demand point down 14.2%, according to the country's National Bureau of Statistics. Meanwhile, German passenger car production in January-June was down by 12% when compared with the same period in 2018, according to the country's automobile association, VDA.
Fastmarkets’ zinc special-high-grade (SHG) min 99.995% ingot premium, dp fca Antwerp, stood at $90-110 per tonne as of July 16, down from $115-125 per tonne at the start of 2019.
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"Demand is very weak," Citi metals strategist Oliver Nugent told Fastmarkets. Citi has set a zinc price expectation of $2,300 per tonne for the fourth quarter of 2019 and for its six to 12 month forecast.
Analysts clearly hold a view for lower zinc prices, with a sense that higher smelter production is a case of when rather than if. But given the performance of the past six months, and with so many factors at play, the metal’s price instability may not be at its end just yet.