Recovery of steel production in China leads to higher prices for zinc

Amid a stronger-than-expected recovery in China's economic growth, Fitch Solutions Macro Research has revised up its forecast for zinc prices for the year.

The agency originally expected the zinc price to be $ 2,100 per tonne, but changed it to $ 2,200 per tonne from a zinc price of $ 2,507 per tonne at the end of 2019.

Zinc prices fell an average of 17.3% in the first three months of this year, but have since recovered to new highs for the year at a current price of around $ 2,483 per tonne.

The agency expects the zinc price to gradually decline each year to $ 2,000 per ton by 2024.

Fitch Solutions says a rapid recovery in steel production and therefore zinc consumption in China will support zinc prices for the remainder of the year and into 2021.

However, a sustained oversupply in the market will lead to lower zinc prices in the coming years.

Fitch Solutions explains that this structural downturn will be driven by sluggish growth in global steel production, as zinc is primarily used for zinc. “After recovering in 2021, we project that annual steel production growth will slow down steadily in the coming years due to declining production increases in China and Europe.

"In China, tightening environmental restrictions on producers and slowing growth in demand from the construction sector will limit growth in steel production, while European producers will cut production due to low steel prices."

The agency adds that given this weakening background, it is forecasting a slowdown in global zinc consumption growth from 2.2% year on year between 2010 and 2019 to an average of 1.1% year over year between 2020 and 2029.

The slowdown in consumption growth will keep the market in surplus in the coming years.

Fitch Solutions maintains its forecast for China's real gross domestic growth at 2.2% this year, unless there is a clear second wave of Covid-19 with additional isolation measures.