Commodities | Aug 14 2020
Zinc’s recent rally and what may happen next; east coast gas production levels rose in July
-Zinc price may reach US$2,500/t by the fourth quarter
-Analysts divided in their projections for zinc in the year ahead
-Low LNG prices may disincentivise investment in production
By Angelique Thakur
Zinc prices: Higher for longer?
The LME zinc price gained 16% over the last month to US$2,392/t. The rise can be attributed to macro drivers like a weakening US dollar, rising money supply and inflation expectations.
At the same time, LME zinc inventories also increased by 61% month on month to 197kt.
Morgan Stanley analysts highlight the present situation is similar to that seen in 2009 when both the price of zinc and the metal's inventory rose simultaneously after the Global Financial Crisis.
The current inventory level amounts to 2.7 weeks of global consumption, considered low enough by Morgan Stanley for the situation to persist in the near term.
In addition, supply disruptions have kept the market tight for most of the year to date, putting a pause on many years of a bearish zinc supply narrative. Citi expects the market to be more balanced until the first half of FY21.
But Morgan Stanley feels the price outlook is bearish. The analysts at Morgan Stanley feel with easing constraints and rising inventories, there is a downside risk to the price.
Mines have started ramping up supply, highlight Morgan Stanley analysts, referring to the latest numbers coming out of China and Peru. Shipments from Canada’s Red Dog mine are also beginning to improve and the market is expected to move to surplus.
In terms of demand, China’s recovery continues with strong export orders and an expanding manufacturing PMI. This has Morgan Stanley expecting zinc demand to grow at around 2.5-3% year on year.
However outside China, demand remains subdued. End-use markets seem to be recovering, Morgan Stanley acknowledges, but it will be some time before they normalise.
Taking into account the recovery in supply and tepid demand (except in China), zinc inventory will likely continue to build over the coming months. This will likely lead to a price correction, predicts Morgan Stanley, with zinc falling back to around US$2000/t.
Presenting a different view, Citi analysts do not consider zinc to be overvalued especially when compared to the levels at which other metals have been trading. They consider the present context more as zinc playing catch-up after lagging through June.
Analysts at Citi had expected zinc to touch US$2,300/t over the next 6-12 months driven by lower refined production in the second half and strong demand from China. The fact this level was breached so soon does not imply there will be a material pullback in the price, Citi reassures.
Zinc prices have a better chance of holding on higher for longer, Citi analysts predict. They do not find market positioning overly stretched and do not believe prices will pull back unless risk increases.
Zinc appears to be trading according to Citi’s bull case that was based on positive covid-19 news. If this scenario is realised, Citi analysts see the potential for zinc to reach US$2,500/t in the fourth quarter.
When looking at the metal’s improving supply-demand sentiment and cost profile, Citi concludes zinc prices do not seem overbought. Prices should hold higher for longer.
Domestic LNG cheaper than imports
July saw east coast LNG production reach a new record at 2,013PJ annualised, primarily from Queensland, the Northern Territory and Victoria.
At the same time, with less gas being exported, there was more available for domestic consumption. In fact, supply available for domestic consumption is at the highest level since September 2015, reports JP Morgan.
Nevertheless, spot gas prices surged 6% over the last month, averaging around $4.61/GJ. According to the analysts, the price surge can be attributed to rising domestic market demand, up 14%. They also point out the demand increase is seasonal and year to date, total east coast gas demand is down -1% while domestic demand has dropped by -2%.
Domestic gas remains cheaper than imports with the spot Asian LNG at a 16% premium to the average domestic price.
While term prices insulate gas producers to a certain extent from the current low prices, JP Morgan does not think the situation is sustainable. The analysts feel low prices will disincentivise investment in upstream production. This, they point out, will lead to a tightening of the market.
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