How is zinc priced?

The international price of zinc resources is directly influenced by the supply and demand relationship and economic situation. The global distribution of zinc resources is mainly concentrated in countries such as Australia and China, with the main producing countries being China, Peru, and Australia. Zinc consumption is concentrated in the Asia Pacific and Europe and America regions. Jianeng is the world's largest producer and trader of zinc metal, with a significant impact on zinc prices. China's zinc resource reserves rank second in the world, but the grade is not high. Its production and consumption both rank first in the world, and its external dependence is high.

One is that LME is the only global zinc futures exchange, occupying a dominant position in the zinc futures market.

LME was founded in 1876 and began conducting informal zinc trading at its inception. In 1920, the official trading of zinc began. Since the 1980s, LME has been a barometer of the world zinc market, and its official price reflects the changes in zinc supply and demand worldwide, which is widely recognized around the world. These prices can be hedged through various futures and option contracts in LME. The market activity of zinc ranks third in LME, second only to copper and aluminum futures.

Secondly, the New York Mercantile Exchange (COMEX) briefly opened zinc futures trading, but it was unsuccessful.

COMEX briefly operated zinc futures from 1978 to 1984, but overall it was not successful. At that time, American zinc producers were very strong in zinc pricing, so that COMEX did not have enough zinc business volume to provide contract liquidity, making it impossible for zinc to arbitrage prices between LME and COMEX like copper and silver transactions. Nowadays, COMEX's metal trading is mainly focused on futures and option contracts for gold, silver, copper, and aluminum.

The third is that the Shanghai Stock Exchange officially launched the Shanghai Zinc Futures in 2007, participating in the global zinc futures pricing system.

There was a brief zinc trading in the history of the Shanghai Stock Exchange. As early as the early 1990s, zinc was a medium to long-term trading variety alongside basic metals such as copper, aluminum, lead, tin, and nickel. However, the scale of zinc trading decreased year by year, and by 1997, zinc trading had basically ceased. In 1998, during the structural adjustment of the futures market, non ferrous metal trading varieties only retained copper and aluminum, and zinc and other varieties were cancelled. As the price of zinc continued to rise in 2006, there were constant calls for zinc futures to return to the market. On March 26, 2007, the Shanghai Stock Exchange officially listed zinc futures, conveying regional changes in supply and demand in the Chinese zinc market to the international market and participating in the global zinc pricing system.

The basic pricing method for zinc spot in the international market is to use the zinc futures contract price as the benchmark price, and add the corresponding markup as the spot quotation. The trend of zinc international spot prices and LME futures prices is highly consistent, because LME zinc price serves as the long-term pricing standard for zinc metal buyers and sellers, and its monthly average price also serves as the pricing basis for zinc metal spot trading.

One is the upward and downward cycles of zinc prices from 1960 to 1978; The second is the oscillation period from 1979 to 2000; The third is the rapid upward and downward cycles from 2001 to 2009; The fourth is the fluctuation period from 2010 to 2020; The fifth is the rapid upward period since 2020. Since 2020, due to the impact of European energy prices, zinc supply capacity has decreased, and the rapid growth of zinc demand has led to a rebound in zinc prices, which continue to rise and exceed $3500 per ton.

In 2022, the latest report from the United States Geological Survey (USGS) shows that the global proven zinc resources are 1.9 billion tons, and the global proven zinc ore reserves are 210 million metal tons. Australia has the most abundant zinc ore reserves, at 66 million tons, accounting for 31.4% of the global total reserves. China's zinc ore reserves are second only to Australia, at 31 million tons, accounting for 14.8% of the global total. Other countries with large zinc ore reserves include Russia (10.5%), Peru (8.1%), Mexico (5.7%), India (4.6%), and other countries, while the total zinc ore reserves of other countries account for 25% of the global total reserves.

Firstly, the historical production of zinc has continued to increase, with a slight decline in the past decade. It is expected that the production will gradually recover in the future.

The global production of zinc ore has been continuously increasing for over 100 years, reaching its peak in 2012 with an annual production of 13.5 million metal tons of zinc concentrate. In the following years, there has been a certain degree of decline, until 2019, when growth resumed. However, the COVID-19 outbreak in 2020 made the global zinc mine output decline again, with the annual output declining by 700000 tons, 5.51% year-on-year, resulting in a tight global zinc supply and continuous price rise. With the easing of the epidemic, the production of zinc gradually returned to the level of 13 million tons. Analysis suggests that with the recovery of the world economy and the promotion of market demand, zinc production will continue to grow in the future.

The second is that the countries with the highest global zinc production are China, Peru, and Australia.

According to data from the United States Bureau of Geological Survey (USGS), global zinc ore production reached 13 million tons in 2022, with China having the highest production of 4.2 million metal tons, accounting for 32.3% of the global total production. Other countries with high zinc ore production include Peru (10.8%), Australia (10.0%), India (6.4%), the United States (5.9%), Mexico (5.7%), and other countries. The total production of zinc mines in other countries accounts for 28.9% of the global total.

Thirdly, the top five global zinc producers account for approximately 1/4 of global production, and their production strategies have a certain impact on zinc pricing.

In 2021, the total annual production of the world's top five zinc producers was about 3.14 million tons, accounting for about 1/4 of global zinc production. The zinc production value exceeded 9.4 billion US dollars, of which Glencore PLC produced about 1.16 million tons of zinc, Hindustan Zinc Ltd produced about 790000 tons of zinc, Teck Resources Ltd produced 610000 tons of zinc, Zijin Mining produced about 310000 tons of zinc, and Boliden AB produced about 270000 tons of zinc. Large zinc producers generally influence zinc prices through a strategy of "reducing production and maintaining prices", which involves closing mines and controlling production to achieve the goal of reducing production and maintaining zinc prices. In October 2015, Glencore announced a reduction in total zinc production, equivalent to 4% of global production, and zinc prices surged by over 7% on the same day.

Firstly, global zinc consumption is concentrated in the Asia Pacific and Europe and America regions.

In 2021, the global consumption of refined zinc was 14.0954 million tons, with zinc consumption concentrated in the Asia Pacific and Europe and America regions, with China accounting for the highest proportion of zinc consumption, accounting for 48%. The United States and India were ranked second and third, accounting for 6% and 5% respectively. Other major consumer countries include developed countries such as South Korea, Japan, Belgium, and Germany.

The second is that the consumption structure of zinc is divided into initial consumption and terminal consumption. The initial consumption is mainly zinc plating, while the terminal consumption is mainly infrastructure. Changes in demand at the consumer end will affect the price of zinc.

The consumption structure of zinc can be divided into initial consumption and terminal consumption. The initial consumption of zinc is mainly focused on galvanized applications, accounting for 64%. The terminal consumption of zinc refers to the reprocessing and application of zinc's initial products in the downstream industrial chain. In the terminal consumption of zinc, the infrastructure and construction sectors account for the highest proportion, at 33% and 23% respectively. The performance of the zinc consumer will be transmitted from the terminal consumption field to the initial consumption field and affect the supply and demand of zinc and its price. For example, when the performance of major zinc end consumer industries such as real estate and automobiles is weak, the order volume of initial consumption such as zinc plating and zinc alloys will decline, causing the supply of zinc to exceed the demand, ultimately leading to a decline in zinc prices.

As the world's largest zinc trader, Glencore controls the circulation of refined zinc in the market with three advantages. Firstly, the ability to quickly and efficiently organize goods directly to the downstream zinc market; The second is the strong ability to allocate zinc resources; The third is the keen insight into the zinc market. As the world's largest zinc producer, Glencore produced 940000 tons of zinc in 2022, with a global market share of 7.2%; The trade volume of zinc is 2.4 million tons, with a global market share of 18.4%. The production and trade volume of zinc are both the top in the world. Glencore's global number one self production is the foundation of its huge influence on zinc prices, and the number one trade volume further amplifies this influence.

Firstly, Shanghai Zinc Exchange has played a positive role in establishing a domestic zinc pricing system, but its influence on zinc pricing rights is still less than that of LME.

The zinc futures launched by the Shanghai Stock Exchange have played a positive role in the transparency of supply and demand, pricing methods, pricing discourse, and domestic and foreign price transmission mechanisms of the domestic zinc market. Under the complex market structure of China's zinc market, the Shanghai Zinc Exchange has assisted in establishing an open, fair, fair, and authoritative zinc market pricing system. The domestic zinc futures market has already possessed a certain scale and influence, and with the improvement of market mechanisms and the increase of trading scale, its position in the global market is also increasing. In 2022, the trading volume of Shanghai zinc futures remained stable and slightly increased. According to data from the Shanghai Stock Exchange, as of the end of November 2022, the trading volume of Shanghai Zinc Futures in 2022 was 63906157 transactions, an increase of 0.64% year-on-year, with an average monthly trading volume of 5809650 transactions; In 2022, the trading volume of Shanghai Zinc Futures reached 7932.1 billion yuan, an increase of 11.1% year-on-year, with a monthly average trading volume of 4836.7 billion yuan. However, the pricing power of global zinc is still dominated by LME, and the domestic zinc futures market remains a regional market in a subordinate position.

Secondly, the spot pricing of zinc in China has evolved from manufacturer quotes to online platform quotes, mainly based on LME prices.

Before 2000, there was no zinc spot market pricing platform in China, and the spot market price was basically formed based on the quotation of the manufacturer. For example, in the the Pearl River Delta, the price was mainly set by Zhongjin Lingnan, while in the Yangtze River Delta, the price was mainly set by Zhuzhou Smelter and Huludao. The inadequate pricing mechanism has had a significant impact on the daily operations of upstream and downstream enterprises in the zinc industry chain. In 2000, Shanghai Nonferrous Metals Network (SMM) established its network, and its platform quotation became a reference for many domestic enterprises to price zinc spot. At present, the main quotes in the domestic spot market include the quotes from Nan Chu Business Network and Shanghai Metal Network, but the quotes from online platforms mainly refer to LME prices.

Firstly, the total amount of zinc resources in China ranks second in the world, but the average quality is low and resource extraction is difficult.

China has abundant reserves of zinc ore resources, ranking second in the world after Australia. The domestic zinc ore resources are mainly concentrated in areas such as Yunnan (24%), Inner Mongolia (20%), Gansu (11%), and Xinjiang (8%). However, the grade of zinc ore deposits in China is generally low, with many small mines and few large mines, as well as many lean and rich mines. Resource extraction is difficult and transportation costs are high.

Secondly, China's zinc ore production ranks first in the world, and the influence of domestic top zinc producers is increasing.

China's zinc production has remained the world's largest for many consecutive years. In recent years, through various means such as inter industry, upstream and downstream mergers and acquisitions, and asset integration, China has gradually formed a group of zinc enterprises with global influence, with three enterprises ranking among the top ten global zinc ore producers. Zijin Mining is the largest zinc concentrate production enterprise in China, with zinc ore production scale ranking among the top five globally. In 2022, the zinc production was 402000 tons, accounting for 9.6% of the total domestic production. Minmetals Resources ranks sixth globally, with a zinc production of 225000 tons in 2022, accounting for 5.3% of the total domestic production. Zhongjin Lingnan ranks ninth globally, with a zinc production of 193000 tons in 2022, accounting for 4.6% of the total domestic production. Other large-scale zinc producers include Chihong Zinc Germanium, Zinc Industry Co., Ltd., Baiyin Nonferrous Metals, etc.

Thirdly, China is the largest consumer of zinc, with consumption concentrated in the field of galvanizing and downstream real estate infrastructure.

In 2021, China's zinc consumption was 6.76 million tons, making it the world's largest consumer of zinc. Zinc plating accounts for the largest proportion of zinc consumption in China, accounting for approximately 60% of zinc consumption; Next are die-casting zinc alloy and zinc oxide, accounting for 15% and 12% respectively. The main application areas of galvanizing are infrastructure and real estate. Due to China's absolute advantage in zinc consumption, the prosperity of infrastructure and real estate sectors will have a significant impact on the global supply, demand, and price of zinc.

China's external dependence on zinc is relatively high and shows a clear upward trend, with the main import sources being Australia and Peru. Since 2016, the import volume of zinc concentrate in China has been increasing year by year, and it has now become the world's largest importer of zinc ore. In 2020, the import dependence of zinc concentrate exceeded 40%. From a country by country perspective, the country with the highest export of zinc concentrate to China in 2021 was Australia, with 1.07 million physical tons throughout the year, accounting for 29.5% of China's total import of zinc concentrate; Secondly, Peru exports 780000 physical tons to China, accounting for 21.6% of China's total import of zinc concentrate. The high dependence on zinc ore imports and the relative concentration of import regions mean that the stability of refined zinc supply may be impacted by supply and transportation ends, which is also one of the reasons why China is at a disadvantage in international trade of zinc and can only passively accept global market prices.

This article was originally published in the first edition of China Mining Daily on May 15th