Pre-Covid-19 we were expecting the refined zinc market to enter a period of surplus in 2020, after four years of global deficit in 2016-2019, but the demand disruption caused by the pandemic made the switch from deficit to surplus more pronounced. Ex. China reported stocks have since risen from a multi-year low in 2019 but do not fully reflect the extent of the surplus that has built since the start of 2020.
Unreported ex. China stocks peaked in 2015
Our estimate of unreported stocks comes out of our supply-demand balance and takes into account reported stock changes. Since February 2020, the LME’s off-warrant stock reports, which show metal stocks subject to an LME Warranting Agreement, have brought visibility to at least some of the ex. China unreported stocks we track. In December 2020, LME off-warrant stocks totalled 121,000 t. In China, we track SHFE, Nanchu stocks and SRB purchases, and again rely on our supply-demand balance to arrive at an estimate of unreported stocks.
By the end of 2019, the zinc market had been in deficit for four years and much of the stock built up in the wake of the global financial crisis had been drawn down. We estimate that around one third of 2015’s 1.6 Mt of ex. China unreported stocks went towards filling refined metal deficits. Ex-China reported stocks had fallen to 560,000 t by the end of 2019 (equivalent to 4.2 weeks’ demand) and our estimate of unreported stocks to around 1.1 Mt.
Unreported stocks in China were relatively low at the end of 2019
In China, we count SRB purchases as demand, rather than stock, as once bought, the metal is not technically available to the market. An SRB sale therefore comes back into our balance as supply. Of the state purchases and sales we have tracked since 2009, we estimate that the SRB still holds around 250,000 t of refined zinc. By the end of 2019, we estimate that the unreported stocks in China built up in the wake of the financial crisis had been exhausted.
Total global stocks were estimated to be 2.0 Mt at the end of 2019
We estimate that total global stocks, both reported and unreported, ended 2019 at around 2.2 Mt. This figure includes global reported stocks of around 750,000 t (including LME, SHFE, Nanchu, China bonded and ILZSG producer, consumer and trader stocks) and unreported stocks of 1.5 Mt. Of this, we estimate that just over 1.0 Mt was in ex. China, some of which would have been pipeline stocks not included in our reported stock numbers. Our numbers suggest that ex. China unreported stocks, excluding pipeline stocks, had fallen to 500-700,000 t by the end of 2019, more than half of which were in Europe.
Before the Covid-19 outbreak in China we were expecting stocks to increase slowly in 2020 H1 but to accelerate as refined metal surpluses increased in H2. However, while Covid-19-related lockdowns led to demand destruction in most major zinc-consuming regions, refined output remained relatively stable. This led to larger-than-expected refined metal surpluses, which in turn led to an increase in both reported and unreported stocks. Although Chinese demand recovered rapidly from 2020 Q2 onwards, net refined imports fell y/y. As demand was hit much harder in ex. China, much of last year’s 500,000 t refined metal surplus remained there. Ex. China reported stocks increased by 160,000 t y/y in 2020 and we estimate that unreported stocks increased by ~300,000 t. It appears that this increase was spread fairly evenly across Europe, Asia ex. China and the USA.
Indian metal accounts for much of the increase in Malaysian and Singaporean stocks
Last year’s Covid-19-related restrictions in India had more of an impact on refined demand than on smelter output and India’s refined zinc exports increased accordingly, with a more than threefold y/y increase in net exports from 51,000 t to 164,000 t. The biggest increases in exports were to Malaysia (99,000 t) and Singapore (70,000 t) and trade data suggest that most of this metal was still in those locations in February (Malaysia) and April (Singapore) this year. Stocks in the LME’s warehouse in Malaysia and Singapore increased by 90,000 t in 2020, so we estimate there was at least 80,000 t of unreported HZL stock in those locations at the end of the year. Of this, 20,000 t was sitting off warrant in the LME’s Asian warehouses in December 2020. As of March 2021, off-warrant stocks in Asia had increase by 35,000 t to 55,500 t, reflecting the import of 35,000 t of metal from India into Malaysia (7,000 t) and Singapore (28,000 t) in 2021 Q1.
This year, we expect India’s refined zinc net exports to remain elevated despite the demand recovery as a forecast increase in HZL’s mine output this year will translate to higher domestic smelter output. We therefore expect the Indian refined market to be in a structural surplus of 120,000 t this year and, while restocking will help lift domestic demand as the economy recovers, much of this surplus is likely to be exported.
Surplus metal has also been shipped to the USA
A demand slump in South Korea last year also led to higher exports in 2020 (499,000 t compared to 431,000 t in 2019) and, while it increased shipments to China and Vietnam, South Korea also shipped 57,000 t to the USA (up from 8,000 t in 2019).
At the same time, Australia’s exports increased by 16.0% y/y in 2020, to 440,000 t, with shipments of 57,000 t to South Korea (which do not show up in South Korea’s import data) and 33,000 t to the USA.
The USA’s net imports increased by 70,000 t y/y in 2020, to 797,000 t, which more than covered the 685,000 t US market deficit. Warrant stocks in the LME’s US warehouses increased by 47,300 t y/y in 2020 and off-warrant stocks were 79,000 t in December 2020. This appears to have gone on to warrant in recent months, with LME stocks in the USA up by ~50,000 t year-to-date at the time of writing and off-warrant stocks down to 20,000 t in April 2021.
Much of Europe’s surplus has remained in the region
Exports from Spain fell by 27.6% y/y in 2020, despite a sharp contraction in domestic demand against stable refined output. The most significant change was in exports to the Netherlands, which were down from 120,000 t in 2019 to 23,000 t. Exports to the USA doubled y/y, to 40,000 t but trade and supply-demand data suggest a stock build in Spain of around 90,000 t last year. Net exports remained relatively low in 2021 Q1 and although Spanish demand is recovering, it is likely that stock is continuing to build.
Less off-warrant stock has shown up in LME warehouses in Europe than in the USA or Asia, with the high-to-date of 23,000 t in December 2020. But we believe much of the world’s surplus metal in 2019 was in Europe. There is no doubt that the European market has tightened this year due to the strength of the European demand recovery and premia continue to tick higher. But we believe there are still sizeable SHG ingot stocks tied up in financing deals and unavailable to the market.
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