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The global refined zinc market will remain in deficit over the coming years, supported by modest demand growth and continued ore under supply.

Refiners, particularly those in China, will scramble to secure concentrate over the coming quarters, on the back of production curtailments implemented over 2015-2016 and two key mines coming offline permanently.

Authored by BMI Research - a unit of the Fitch Group

Over the long term, the slowdown in China's steel sector will weigh on global refined zinc demand, leading to a broadly balanced market by 2022.

We forecast global refined zinc production and consumption growth to average 1.8% and 1.4%, respectively, over 2018-2027.

Global

Global refined zinc production growth will accelerate modestly over the coming years as elevated prices incentivise output and new mined production enables stronger smelter activity.

We forecast global refined zinc production to edge higher, from 14.2 Mt in 2018 to 16.8 Mt by 2027, averaging 1.8% annual growth.

China

China's sector will register modest production growth over the coming years as tightening environmental standards dent older capacity yet rising prices encourage larger producers to ramp up output.

We forecast the country's production to increase from 6.5 Mt in 2018 to 8.3 Mt by 2027, averaging 2.9% annual growth.

While this pace of production growth remains above the global average, it represents a notable slowdown from China's previous 10-year average zinc production growth rate of 5.6%.

Tightening environmental standards in China will continue to weigh on Chinese production growth.

For instance, in 2017, Zijin Mining produced 197 kt of refined zinc, representing an 8.2% y-o-y decline.

The firm is progressing the Zijin Zinc Industry phase three technological upgrade project to 20 kt per day and processing capacity.

Given Chinese smelters' reliance on imported zinc ore, producers with low-cost domestic zinc mines and new projects abroad will fare better over the coming quarters, as prices remain elevated.

For instance, in 2017, China Minmetals reported record profits and the firm's Zhuzhou Smelter Group subsidiary will benefit from the ramping up of mined zinc production at the Dugald River project in Australia over 2018.

Rest of world

India will be the bright spot for global refined zinc production, as the country's largest producer, Hindustan Zinc continues to ramp up output, supported by declining operating costs and India's strong economic growth.

Both HZL and parent firm Vedanta Resources will boost spending on projects in 2018, driving production growth in India.

We forecast India's zinc production growth to outperform peers, averaging 4.8% annual growth over 2018-2022.

Japan's sector will face challenges from the zinc ore supply shortage.

For instance, Mitsui Mining & Smelting expects H1,2018 (six months ended September 2018) zinc production to remain stagnant y-o-y at 106 kt.

We forecast the country's zinc production to edge lower, from 606 kt in 2018 to 525 kt by 2027.

Demand: Growth rate to lose steam along with steel sector

Global

Global refined zinc demand growth will decelerate over the coming years, averaging 1.4% annual growth over 2018-2027, due to a subdued global steel production outlook.

This rate represents a continued slow-down in growth, as global refined zinc demand averaged 2.6% annual growth over the previous 10-year period.

China

We forecast Chinese demand growth to average 1.1% over 2018-2027 compared to average annual growth of 5.5% over the previous 10-year period, reflecting the slowdown in the steel sector.

In terms of volume, China will remain the largest  consumer by a wide margin, using 6.8 Mt in 2018 and 7.5 Mt by 2027.

Over the coming years, the structural decline in steel production will underpin the country's decelerating demand growth, as steel galvanising accounts for approximately 52% of the country's total refined zinc usage.

We forecast China's steel output to average a 0.2% annual growth rate over 2018-2027 compared to annual average growth of 5.7% over the previous 10-year period.

On May 31, the US government announced it will impose tariffs of 25% on steel exports coming from the EU, Mexico and Canada.

While tariff protection for US steel makers is a negative development for global steel prices as it encourages steel mills in the world’s third-largest producer to increase output, domestic prices in the US have risen over 30% in the year to date due to the anticipation of a supply shock.

We expect the recent divergence between US, Chinese and European prices, with the latter two heading lower, to continue over the coming months.

Easing Chinese steel prices will weigh on production growth, thus curbing zinc demand from the largest global consumer.

Rest of world

India will remain the global bright spot for zinc demand growth, as a strong manufacturing sector drives economic growth.

We forecast India's zinc consumption to increase from 711 kt in 2018 to 1.1 Mt by 2027, averaging 5.4% annual growth.

Our solid steel production outlook bolsters this view, as we expect the country's steel output to register an average annual 5.9% growth over 2018-2027.

Indeed, over the first four months of 2018, India's steel production increased by 4.2% y-o-y to 35.4 Mt.

In the US, the second largest global zinc consumer, a more positive steel production picture on the back of protectionist policies under the Trump administration will keep zinc demand supported over the long-term.

We have revised up our steel production growth forecast for the US in 2018, from a previous contraction of 1% to 2.5% growth, as limits on imports tighten the domestic market and prompt mills to ramp up output.

We forecast US refined consumption to edge higher, from 613 kt in 2018 to 653 kt by 2027.

Trade: US protectionism shaking up trade

On May 31, the US government announced it will impose tariffs of 25% on steel exports coming from the EU, Mexico and Canada.

The US had originally given them an exemption following the initial announcement that it would impose the tariffs in March.

While tariff protection for US steel makers is a negative development for global steel prices as it encourages steel mills in the world’s third-largest producer to increase output, domestic prices in the US have risen over 30% in the year to date due to the anticipation of a supply shock.

Given that steel galvanising accounts for most of refined zinc end-use and the US deficit in product, an uptick in US steel production will result in rising imports.

The US imports most of its product from Canada and Mexico.