Is a zinc comeback looming?

Glencore Queensland Metals mines zinc and copper in the Mt Isa region. Image: Glencore

Zinc market turbulence is starting to fade as miners become more optimistic about the commodity’s future. Nickolas Zakharia writes.

Australia’s zinc industry rarely receives the same attention as its iron ore or coal sectors.

Despite the spotlight being directed elsewhere, Australia is the third largest zinc producer worldwide.

And while zinc prices suffered sobering blows in the wake of the COVID-19 pandemic with mines in South Africa and Peru temporarily shutting down, the lights stayed on at Australia’s mines, giving the country a key advantage from a global perspective.

To look at the zinc price alone would do a disservice to the commodity’s future prospects.

China, which consumes about half of the world’s zinc supply according to a report by Fitch Solutions, recovered from COVID-19’s lockdown measures earlier than other countries, helping bolster commodity demand across the board.

“Zinc prices will likely edge higher in the coming months as the negative shock to global demand from the COVID-19 outbreak lessens,” Fitch explains in a zinc report released in June.

“As of June 22, three-month LME zinc had already recovered by 14.7 per cent from a March low of $US1,784/tonne ($2,458) and we expect a further rebound in the coming months.”

That rebound is coming in the form of a huge ramp up in metals-intensive infrastructure spending from China.

The general view accepted by zinc analysts is that the commodity will be in a surplus this year. Fitch Solutions forecasts a total surplus of 71,000 tonnes of zinc in 2020, compared with a deficit of 189,000 tonnes in 2019.

But Wood Mackenzie has kept moderate expectations for the commodity.

“The Chinese economy (is) enjoying a good recovery from the (COVID-19) lockdown – it is the only bright spot for global zinc demand. Our base case assumption is for a modest (2-3 per cent) drop in Chinese demand this year, but there is a growing risk that growth will end the year flat or marginally up on 2019,” Wood Mackenzie lead and zinc research director Andrew Thomas tells Australian Mining.

“A total surplus of 71,000 tonnes of zinc is expected for 2020, compared to a deficit of 189,000 tonnes in 2019.

“We expect the zinc market to be in surplus for several more years, projects that are already financed and under construction will continue to come on stream, but the development of earlier stage projects is likely to stall or even stop.

“Our base case assumption is that prices will fall later in the year as supply disruptions are overwhelmed by demand losses and rising metal stocks.”

Zinc is commonly used to galvanise mild steel, which is required for building, roads, infrastructure and transport projects. The commodity is also used to galvanise the steel of vehicles and has increasing use as a plant fertiliser.

According to Thomas, the latter is where new demand will be the seen in the coming years.

“The most important emerging use for zinc is as a micronutrient in agricultural fertilisers, this use is relatively modest currently, but should become progressively more significant over the next 10 years,” he says.

White & Case partner John Tivey tells Australian Mining that demand for Australia’s steel, including zinc, will increase as Chinese infrastructure projects ramp up. 

“Demand from China for metals throughout the COVID-19 pandemic has remained one of the largest drivers allowing big miners to continue operations, and this demand is expected to continue in the rebuilding phase,” he said. 

“China appears to have been the first into the crisis and the first out, coupled with an appetite to spend its way out of slowing growth.” 

Australia’s zinc heavyweight

For almost 100 years, Mt Isa has been an integral part of Queensland’s mining industry.

Mount Isa Mines (now Glencore Queensland Metals) is part of Glencore’s group of companies, focussing on zinc and copper mining in the Mt Isa region.

“We have recently combined our Queensland copper and zinc operations under a single management structure, named Glencore Queensland Metals,” a Glencore spokesperson tells Australian Mining.

Glencore’s zinc assets in and around Mt Isa involve the 4.5 million tonne per annum George Fisher underground mine and the Lady Loretta underground mine, which is operated by RedPath Australia.

The Mt Isa mine is one of the largest zinc operations in the world with an expected 650 million tonnes of resources.

Its zinc operations alone provide 1200 jobs to employees and contractors, which helps stimulate the local and broader economy.

Glencore’s Mt Isa mine is one of the largest zinc mines in the world. Image: Glencore

 

“We are proud of the very significant socio-economic contribution that these operations make to the local, regional and Australian economies,” the Glencore spokesperson says.

“In 2019, our metals operations employed more than 4200 people in north-west Queensland and contributed $2.5 billion to the Australian economy in the form of wages and salaries, spend on goods and services, payment of taxes and royalties and through partnerships with community organisations.”

Glencore hopes its zinc production will pave the way for a low carbon economy.

“As one of the world’s largest diversified resource companies Glencore has a key role to play in enabling the transition to a low carbon economy,” the spokesperson adds.

“The zinc, copper, cobalt and nickel we produce play an important role in this, given they underpin the energy and mobility transformation.”

Glencore expects its zinc supply to continue growing, with production forecast to increase despite the turbulent prices the commodity has faced for several years, according to its 2019 annual report.

“We believe that metal production increases are necessary for the market to restock from the current multi-year lows,” Glencore states.

New Century’s new hope

The Century zinc mine in the Lower Gulf of Carpentaria, Queensland was historically one of the world’s largest zinc mines between 1999 to 2015.

However, the mine’s major zinc deposit was depleted by 2016, causing the operation to shut down.

Just a year later, New Century Resources acquired the mine and set upon re-opening the site as a hydraulic mining operation that would reprocess its existing tailings.

Since launching production in 2018, New Century has catapulted into the top 10 zinc producers in the world, with a site that has more than two million tonnes of zinc metal resources.

“The goal for our business was to re-establish Century as a top 10 zinc producer and you can see that’s what we’ve been able to achieve again,” New Century Resources managing director Patrick Walta tells Australian Mining.

“Within three years, we’ve been able to look at it under a different lens with a different opportunity. We’re expanding that operation and building up into a 12 million tonne per annum run rate.”

In the June 2020 quarter, New Century achieved record production at the mine for the company with 34,000 tonnes of zinc metal.

“We’ve still got a whole heap of ramp up to go,” Walta says. “But the reality is we’re a major part of the global zinc story now.”

Walta says New Century has actually reaped the rewards of the COVID-19 pandemic’s impact on the market.

“Outside of the COVID-19 pandemic, Australia in terms of its zinc production and mining in general has been largely unaffected,” he says.

“That’s why our output keeps increasing and our costs keep dropping because we’re increasing that mining rate, working on improving the performance in the processing plant.”

As a new kid on the block, New Century is still ramping up production.

This means its treatment charges come in the form of spot treatment deals – which involve a one-off payment with prices varying between each individual contract – rather than benchmark contracts that have an annual set price.

New Century uses a hydraulic mining
process for reprocessing tailings.

 

“You typically start with spot contracts, but then you move to your benchmark long-term contracts over time,” Walta says.

“Most miners that are already established and already ramped up might be 80 per cent benchmark, 20 per cent spot, but New Century is the other way at 20 per cent benchmark and 80 per cent spot.”

For Walta, this unique position gives New Century a key advantage in current market conditions, which are seeing spot treatment charges drop from $US300 to $US150 per tonne of zinc in June due to COVID-19’s industry shutdowns.

“COVID-19 forced industry shutdowns, which really caught everyone by surprise, so the smelters were thinking they had supply and that they had procurement schedules ahead of them,” Walta says.

“When COVID-19 hit, the heart just got ripped out of that supply chain and that’s why the treatment charges fell off a cliff.”

“So, for miners who have a good portion, or the majority of their contracts linked to spot deals, it’s much better conditions.

“Even though the zinc price is low, the treatment charges for New Century represent about 40 per cent of our costs.”

As for zinc’s future demand, Walta forecasts an increased use of zinc with the production of electric vehicles (EVs) from developing countries with emerging middle classes.

He says as the world progressively shifts towards EVs, the demand will be for better quality vehicles that don’t rust out.

“In the US and Australia for example, around 80 to 85 per cent of the cars have rust proofing because people demand their cars to last,” Walta says.

“Developing nations in areas of India and China, the rustproofing rates on vehicles have been down to 15 to 20 per cent.

“You’re seeing an opportunity here for a huge amount of consumption to increase as the Indian and Chinese growing middle class demand higher quality necessities, such as a car that doesn’t rust out in a year.

“So, we might see a very rapid increase of zinc usage in the auto industry as a result of rustproofing rates increasing.”

With market dynamics creating opportunity for the zinc market, in both the short- and long-term, Walta has reason to be optimistic. But there is also no room for complacency at New Century.

“As it stands for now you’ve got to be as efficient and as lean and mean as you can,” he concludes.

This article also appears in the September issue of Australian Mining.

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