Zinc’s Surprising Surge: Exploring the Inventory Rollercoaster

Introduction

In the world of commodities, zinc has recently taken center stage as its prices experienced a significant rally, surging by 10.5% between August 22nd and September 22nd, 2023. This remarkable uptick can be attributed to a dramatic drop in zinc inventory at the London Metal Exchange (LME), which plummeted by over a third. This development has sparked renewed interest and intrigue among investors and industry experts alike. In this blog post, we will delve into the reasons behind this surge, the implications it may have on the market, and the multifaceted role that zinc plays in various industries.

The Rollercoaster Ride of Zinc Inventory

The story of zinc’s recent price rally begins with a tale of inventory fluctuations. Back in February 2023, LME zinc inventory reached its lowest levels since 1975, with only 15,600 tonnes in storage. This alarming drop set off alarm bells in the commodities market, signaling potential supply constraints and physical tightness in the metal. While concerns were mounting, the Shanghai Futures Exchange (SHFE) inventory remained relatively low. However, this worry was short-lived as SHFE inventory subsequently expanded significantly, alleviating concerns about zinc availability.

In a surprising twist, LME inventory took a sharp upward turn, increasing ten-fold to 153,975 tonnes by the end of August 2023. This expansion led to a nearly 30% drop in zinc prices between February and August. Investors were beginning to believe that the fears of a zinc shortage had been overblown.

Yet, the rollercoaster ride continued. Inventory is now declining once again, with LME inventory falling by more than a third, from 153,975 tonnes on August 31st to 101,550 tonnes on September 25th, 2023. This new development is reigniting discussions about the metal’s supply dynamics and potential implications for various industries.

The Diverse Uses of Zinc

To understand the significance of zinc’s price movements, it’s essential to grasp the extensive range of applications for this versatile metal. The primary use of zinc is in the galvanizing process, where it acts as a protective shield for iron and steel, preventing them from rusting. This is crucial in the construction of infrastructure and public transportation, as it extends the lifespan of materials used in bridges, railway tracks, and public transportation hubs.

Zinc’s versatility doesn’t stop there. It can be alloyed with other metals to create various products, such as brass and bronze. These alloys find applications in architectural design, commercial products, and much more. Moreover, zinc is integral to energy storage, with zinc-carbon batteries providing an economical and energy-efficient alternative.

Zinc in the Energy Transition

As the world shifts towards renewable energy sources, zinc’s role becomes even more pronounced. Zinc-ion batteries offer a water-based chemistry that mitigates some of the fire safety concerns associated with lithium-ion batteries. With policies like the Inflation Reduction Act in the US and REPowerEU in the EU promoting the transition away from fossil fuels, the demand for solar and wind turbines is expected to surge.

Zinc is a critical component in these applications, particularly for corrosion protection in solar power installations that can last for decades. Estimates indicate that solar power plants already account for a substantial portion of global zinc consumption, with further growth anticipated. In scenarios aligned with ambitious climate goals, such as limiting global warming to 1.5°C, zinc consumption in these sectors could increase significantly.

Navigating Zinc Balances

To navigate the complex world of zinc investing, it’s essential to consider supply and demand dynamics. The International Lead and Zinc Study Group (ILZSG) predicted a supply deficit of 45,000 tonnes for 2023. However, their earlier numbers showed a surplus in zinc supply during the first half of the year, totaling 370,000 tonnes.

The upcoming ILZSG forecasts, expected after their October 5th-6th meeting, will shed light on how they interpret China’s economic turnaround. Recent data indicating strong industrial production in China could have a significant impact on global zinc balances. The divergence between forecasts and realized numbers underscores the importance of staying informed and adaptable in the ever-fluctuating world of commodity investing.

Conclusion

Zinc’s recent rally, driven by a substantial decline in inventory, highlights the intricacies of the commodity market. As we look to the future, zinc’s role in protecting infrastructure, supporting renewable energy, and driving technological innovation cannot be overstated. However, investors should exercise caution, recognizing that historical performance is not a guarantee of future results. Keeping a watchful eye on supply and demand dynamics, policy changes, and global economic developments will be crucial for those seeking to navigate the zinc market successfully.