Gas spike in Europe affects smelting, tightening supply could push up zinc prices!

By    24 Aug,2022

Energy prices in Europe have been soaring for months. In fact, foreign media recently reported that rationing is already being discussed for the cold winter months. Most people know that Russia's invasion of Ukraine and hostile reaction to sanctions are to blame. However, an unusually hot summer and increased demand did not help one bit.

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A reduction in natural gas from Russia due to supply and demand caused energy prices to spike across the continent, which in turn forced multiple smelters to curb overall production of energy-intensive metals. What were the first commodities on the chopping block? Aluminum and zinc. After all, both of these metals require a lot of electricity and, frankly, many smelters simply can't afford them.


In fact, the foreign press recently noted that in Europe energy now accounts for about 80% of the cost of zinc and aluminum, which is twice the average budget allocation of previous years. Europe's largest zinc producer, Glencore, says this pressure has taken a toll on competition. Recently, Australia's Newstar Nyrstar, France's Auby Auby and Belgium's Balen Balen have cut production at their European smelters.


In fact, it is estimated that smelter closures could lead to a 150,000 ton reduction in global zinc production this winter, on top of the cuts already made in 2021. Again, a rise in zinc prices seems inevitable due to supply and demand.

According to the London Metal Exchange LME, stocks of zinc and aluminum are already getting low. In the case of the former, there are only about 74,000 tons left, compared to nearly 250,000 tons a year ago. Adding fuel to the fire is the fact that about a third of them are already ready for delivery. The reduced supply is the main reason for the rally in zinc prices this summer, which is why many believe prices will continue to rise. As Sucden senior analyst Geordie Wilkes says, "It's probably only a matter of time before zinc prices rise again."


Other experts, however, believe that supply may not be the determining factor after all. These believe that despite production problems, the global economic slowdown will dampen demand enough to keep prices low. As one JPMorgan analyst put it, "Consumer manufacturers of the metal may also be constrained, creating a shock to demand that could completely offset or even outweigh the impact of a cessation of supply."


It is a fact that zinc's primary use is to protect steel from corrosion through galvanization. If the global economy does come to a standstill, demand for galvanized steel could drop significantly. While the construction industry is struggling around the world, it is still expected to grow by trillions of dollars through 2030. Even taking into account over- and under-estimates, this is still a huge market and there is strong demand for galvanized products.


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