Half of the world’s zinc consumption of 13.75M tonnes in 2015 is used to galvanize steel, 34% to produce brass and other alloys, while the remainder is used for a broad range of purposes. 2015 mine production was equivalent to 13.47M tonnes. Warehouse inventory on the London Metal Exchange (LME) peaked at 1.2M tonnes in November 2012 and has been declining since, to 434,000 tonnes today. Although there may be inventories redistributed elsewhere and many analysts are concerned that there may be additional hidden inventories, the significant downward trend is unmistakeable. Over the last few years, many large mines have been depleted and closed, including Lisheen in Ireland, Skorpion in Namibia and Century in Australia. Glencore and Nysar, among others, have also temporarily shuttered zinc production. The International Lead and Zinc Study Group (ILZSG) reports mine supply down by about 500,000 tonnes in 2016 YTD compared to 2015. The LME inventory reduction is now approaching 800,000 tonnes and is at a level not seen since 2010. Looking forward to the rest of 2016 and 2017, analysts at CRU and Wood Mackenzie expect the overall zinc metal market to remain in significant deficit, and this should reduce inventories below the critical five weeks of consumption. According to the ILZSG, production curtailments, together with sustained consumption – in part due to Chinese economic stimulus for infrastructure construction – has created a production deficiency of some 400,000 tonnes YTD through May 2016. Since 2010, the price of zinc has oscillated between about US$0.80/lb. and US$1.10/lb. Then, in 2015, despite production curtailments, it declined after the first quarter, reaching a low of US$0.68/lb. in early 2016. Since then, most analysts have been very bullish on zinc, especially as the price has risen dramatically – by 41% YTD, settling at US$0.99/lb on Friday. There are ongoing concerns: there may be hidden inventory to be released to the market at higher prices, restarting of shuttered mines in China, the world’s largest producer, and in the west. So far, these concerns have proven to be unfounded, allowing most analysts to declare a zinc bull run underpinned by the 41% gain in 2016, albeit from a near six-year low. Among more than 20 commodities covered by Macquarie, zinc’s outlook is the rosiest because the combination of major supply constraints and the lack of new supply coming online are set to increase the deficit in the zinc market further, supporting a continuation of the bull market. Previous zinc mine closures have had a significant impact and there are few new projects available to replace lost production. Already, however, a major producer, the London-listed miner Vendanta has dedicated half of its US$1-billion capital expenditure for the coming year to zinc. It is essentially restarting big plans it had before global miners went into cost-cutting mode. Last week, the miner reiterated its commitment to the world-class Gamsberg zinc project in South Africa and says it plans to spend US$200 million this year. Goldman Sachs has been one of the most bullish on the outlook for zinc. Recently, the bank said it was the metal most likely to benefit from any infrastructure growth in China. A quarter of its end use demand comes from infrastructure, it said. Goldman is bullish about zinc because at current prices, demand for zinc exceeds supply, and prices have to rise to hit equilibrium. Zinc is the base metal most exposed to Chinese infrastructure demand, a quarter of its end-use. Goldman is bullish on zinc, but only on a 6-month timeline. As China transitions into a consumption-led economy, it will need less “‘capex-heavy metals like zinc,” warned the bank. (Written by Peter Jones, Executive Vice President, Century Global Commodities Corporation)