To date, since January of 2016, when it hit a 67¢/lb. multi-year low, the price of zinc has jumped by 82% to $1.24/lb., an eight-year high. While the latest massive zinc over-supply appears to be over, those calling the end of this recurring cycle have looked foolish before. However, because of the reduction in zinc production through mine closures, the lack of immediate new mine projects and practically zero exploration for many years, this time the landscape is ripe for a sustained period of higher prices. MMG’s chart below from Wood MacKenzie data is predicting a surge to over $1.80/lb in 2018. The late 2015 anticipatory obituaries for Glencore, the world’s largest zinc trader, seem like a distant memory now. Along with zinc, Glencore has risen from the grave.

Mine closures have been a key component of this price turnaround – some permanent, due to depletion, others temporary, many by Glencore, in an effort to restrict market supply. China, the world’s largest zinc producer and consumer, has also curtailed mine production in Hunan province. Chinese demand now constitutes nearly half the global total for most industrial metals; for example, the country buys between 70% and 80% of the world’s seaborne iron ore. China's economic growth came close to a hard landing last year, sending most commodity prices, including zinc, to multi-year, and sometimes decade lows. To the surprise of many, China's GDP and demand for raw materials rebounded as 2016 progressed, triggering a resurrection of prices. Iron ore rose an amazing 80%, coking coal increased three-fold, zinc increased by over 60% and copper, a late mover, was up about 22% by year-end. Despite a modest growth contraction, China’s demand for commodities remains eye-watering.

China is also the main player in the world market for zinc, contributing approximately 50% of global consumption. On the supply side two “top 10 club zinc mines”, Century in Australia and Lisheen in Ireland, closed recently, removing about 0.6 million tonnes a year from the market. Other production cuts have included Nyrstar’s Myra Falls mine in Canada and Campo Morado mine in Mexico, as well as Gordonsville in the US. Earlier, Teck’s Duck Pond and the Wolverine mine in Canada, as well as Penoles Niaca mine in Mexico were closed. Previously, Glencore had also curtailed production to the tune of 500,000 tonnes per annum; in 2012, it also shuttered depleted mines at Perseverance and Brunswick in Canada. New mines under development include MMG’s Dugold River in Australia and Vendata’s Gamsberg in S. Africa, both likely top 10 club members. They are slated for production in 2018. Meanwhile, Glencore plans to expand production at its McArthur River mine in Australia, although environmental concerns there may be challenging. These factors have contributed to a production imbalance that is reducing zinc inventory, keeping the market in deficit and therefore, putting upward pressure on the zinc price.

The global demand for refined zinc metal is forecast at 13.85 million tonnes in 2017. The International Lead and Zinc Study Group also forecasts world zinc mine production to fall to 13.20 million tonnes. The industrial end users of zinc now face the long-awaited perfect storm, where a modicum of demand growth encounters a chasm in the production pipeline. This trend is feeding through to the LME warehouse, as the above chart shows. Statistics suggest that Shanghai zinc stocks have also experienced considerable shrinkage. Despite the fragmentation of the industry, good production discipline, especially from temporarily shuttered mines, should secure a solid zinc price for the next several years. - Peter R Jones, Executive Vice President, Century Global CommoditiesCorporation