Zinc prices have been on a downward trend since January, following the sharp rises seen in 2022. This trend is not encouraging for zinc producers in Europe, who are already struggling with high electricity costs. In other regions of the world, the situation is different, but also ambiguous.
In the depths of Spain
Australian company Europa Metals summarised the results of recent drilling at the Toral deposit in north-western Spain: after seven holes were drilled, rock sampling and subsequent mineralogical analysis revealed polymetallic mineralisation.
Chemical analysis showed relatively high metal concentrations ranging from 4.46% to 22.7% zinc equivalent, depending on the length of the core (rock sample taken from the drill hole). This confirmed the results of previous exploration work at Toral, which estimated reserves of 720,000 tonnes of zinc, 510,000 tonnes of lead and 15 million troy ounces of silver.
At the same time, Europa Metals is nearing completion of its environmental studies which, together with geological information, will be used to apply for a polymetallic mining licence from the Mining Department of Castilla y León. Finally, Europa Metals may commence construction of an open pit mine and concentrator at Toral.
Among the top nine
The Toral development project is one of many currently underway in Europe to identify previously unknown deposits of zinc and related metals. They are intended to replace the mines that have been mothballed over the past three decades, which have left Europe’s zinc industry without a local source of raw material.
The latest loss is the decision announced in June this year by Swedish group Boliden to decommission the Tara mine. In simple terms, this means that zinc production at the mine will cease and almost all of its employees (the Tara workforce consists of around 650 people) will be made redundant. A small number of staff will remain to monitor the mine and the environmental situation around Tara.
Boliden was prompted to take this difficult step following an accident at Tara in November 2021. During the sinking of a ventilation shaft, groundwater entered the mine workings and flooded them. The miners had to make heroic efforts to salvage the equipment.
Tara, in eastern Ireland, was the ninth largest zinc mine in the world at the time of the disaster, producing 2.3 million tonnes of raw material and 127,000 tonnes of zinc concentrate in 2020. In 2022 it produced 103,000 tonnes of zinc concentrate, supplying 40% of Boliden’s requirements. However, the downturn in the London Metal Exchange (LME) zinc price since April 2022, high energy prices, rising production costs and Tara’s operational problems have resulted in negative cash flow, putting an end to its future and making Boliden extremely dependent on third-party zinc feedstock suppliers. The Carpenberg mine, which is still in operation, will certainly not help Boliden to the extent that they need.
Meanwhile, Boliden has long been on the raw materials needle. In 2022, its companies reduced zinc concentrate output by 3% to 260.8 thousand tonnes, while production of pure metal remained almost unchanged at 475.3 thousand tonnes. A simple comparison shows that before the closure of Tara, about half of Boliden’s zinc concentrate requirements were met by purchases from the global market. Now it will have to source up to 65-70% of its existing requirements or reduce zinc production. Both options are definitely unpleasant.
The Green Deal spells trouble
Boliden’s main competitor in the European market, the Dutch company Nystar, is not faring any better. It has five mines in the US state of Tennessee and has had no accidents in recent years. However, Nystar’s zinc production is suffering from high electricity costs.
In August last year, Nystar announced the closure of its 135,000 tonne per year Budel zinc plant, which has been operating at limited capacity since autumn 2021. Unlike Boliden, Nystar did not decide to lay off its employees at Budel, but rather to reassign them to maintenance work and training.
Nystar’s other two steel mills, Balen in Belgium and Auby in France, were already operating at reduced capacity as early as October 2021. Four months passed, and in December 2022 Nystar sent Auby into shutdown.
The twist is that all three Nystar plants are supplied with electricity from wind and solar farms and therefore have a minimal carbon footprint. However, the rising cost of electricity and the burden of carbon costs have been passed on to industrial consumers by power companies, and Nystar is no exception. The compensation offered by the European Union authorities to energy-intensive companies varies from country to country, putting Budel, Balen and Auby at a distinct competitive disadvantage compared to other zinc producers.
In February 2023, Nystar announced that Auby would be restarted and that zinc production would resume as early as March. However, the stability of its operations is not expected because of the imbalance of the energy market in Europe due to excessive enthusiasm for “green politics” and the reduction of supplies of “blue fuel” from Russia, which had to be replaced by more expensive liquefied natural gas from the US, Qatar, and other countries.
China surging ahead
Even the mighty Glencore could not save the Nordenham plant from closure in November 2022. The plant, which smelted 165,000 tonnes of zinc per year, was the second in Glencore’s structure to fail under the weight of energy tariffs (before that, Porovesme in Italy, which smelted 100,000 tonnes of zinc per year, closed in December 2021). For Glencore, which competes with Nystar (and controls its trader Trafigura), the episode was a severe blow to the reliability of its business.
Against the backdrop of the difficulties facing the zinc industry in Europe, China is showing positive momentum: in the first half of 2023, Chinese zinc production rose by 8.6% to 3.2 million tonnes. It is true that zinc production in China in June fell by 2.1% to 552.5 thousand tonnes compared with May, but it is still 13.1% higher than the result achieved in June 2022.
The decline in zinc production in June was caused by scheduled maintenance of process equipment at a number of smelters. However, the availability of zinc raw materials at the smelters was good, ensuring that zinc production volumes in China were above the average monthly 2023 output.
In July-August, the repair work will be stepped up and China’s zinc production will be lower than in it was in June. However, it will still be above the previous year’s levels.
By the end of 2023, we can expect zinc production in China to reach 6.1-6.2 million tonnes (in 2022 it was almost 6 million tonnes). We cannot expect growth to reach 6.5 million tonnes due to the slow recovery of the Chinese economy after the extensive quarantine restrictions caused by the coronavirus pandemic, which is reflected in the weakness of the construction sector, which is a customer for steel structures coated with zinc to protect against corrosion.
We should also take into account the peculiarities of the operation of the Chinese zinc industry – its plants reduce their workload before the Chinese New Year, a holiday which lasts longer in China than in Europe and North America, and during which employees of plants and factories across the country are granted leave.
There is one, there will be two
The situation with zinc production in Russia is ambiguous. To date, there is only one zinc production facility in Russia – the Chelyabinsk Zinc Plant (CZP), owned by the Ural Mining and Metallurgical Company (UMMC), which produces 200,000 tonnes of zinc per year. Before that, there was another one, Electrozinc in North Ossetia, which burned down in 2018 and which produced 73.6 thousand tonnes of zinc in 2017 (its owner was also UMMC).
Now the Careplant plant with a capacity of 120,000 tonnes per year is being built in the Chelyabinsk region. It is scheduled to be operational next year. The operator is Polymet Engineering. There is reason to believe that the investor is the Russian Copper Company (RCC): in 2020 there was talk of it building a plant to produce 150,000 tonnes of zinc a year. A comparison of the projects shows an insignificant difference in parameters (by the way, in 2008 UMMC and RMK studied the possibilities of creating a joint venture in the Sverdlovsk Oblast with a capacity of 150 thousand tonnes of zinc per year). For unknown reasons the project was not implemented).
Until the joint venture is launched, the demand for zinc on the Russian market will be met by sales of CZP products and imports from Uzbekistan and Kazakhstan. There are no sanctions against Russian zinc in Europe and the USA, with the exception of the LME blocking the acceptance of CZP products into its warehouses in October 2022.
More and less
The global market is now clearly weak. The LME prices, which reached a three-year low of $2,229 per tonne in May, are now around $2.5 thousand and have not moved higher. The strengthening of the dollar and the continued lack of investor interest, with investors preferring to invest in other commodities, are working against a rise in zinc prices.
The International Lead and Zinc Study Group’s forecast of a 3% increase in global zinc supply to 12.86 million tonnes and a 2.1% increase in consumption to 13.8 million tonnes in 2023, assuming a relatively modest surplus of 60,000 tonnes, is relevant here. The CRU Group projects a much more impressive zinc surplus of 140,000 tonnes and a price of around $2,000 by the end of 2023.
The most likely zinc surplus in 2023 will be smaller – around 70,000 tonnes – due to existing energy supply challenges in Europe, which may lead to further smelter closures, and rising zinc production in China. Based on available data, zinc production in Europe in 2023 could grow by a maximum of 2-3% to 2.2 million tonnes, while in China (as mentioned) it could also grow by 2-3% to 6.1-6.2 million tonnes. The cost of zinc on the LME is likely to fluctuate within a wide range of $2.1 to $2.6 thousand per tonne.