Construction Sector Impacts China’s Zinc Market Landscape

In the intricate world of global zinc consumption, construction is one sector that stands out. The construction sector comprises nearly half of the zinc consumption globally. However, in recent years, this sector has faced challenges, particularly in China, the epicentre of the zinc market. Despite a contraction in the Chinese construction sector, zinc inventories have defied expectations by failing to accumulate in SHFE warehouses. This anomaly prompts us to delve into the complex dynamics of the zinc market. Let’s get started:

Shrinking Footprint 

Construction activities in China have been on a downward trajectory, with the floor area under construction contracting by an average of 34.9% since March 2022. Real estate investments have followed suit, plummeting by an average of 12.8% year-on-year during this period. Despite numerous government measures to bolster the real estate industry, the end demand has dwindled, leading to reduced zinc consumption.

Global Implications

The International Lead and Zinc Study Group (ILZSG) data reveal that zinc’s global demand has contracted by 2% in 2023. This decline can be primarily attributed to the slowdown in the Chinese construction sector, which has a significant ripple effect across the globe.

Inventory Mystery

While zinc inventories have been on the rise in China, they remain curiously low compared to historical levels. To add to the intrigue, in 2022, during regional lockdowns and a tumultuous property sector, China exported a substantial amount of its surplus zinc, totalling 81,000 tons. This export frenzy was driven by Western market shortages caused by zinc smelter shutdowns in Europe, triggered by the energy crisis. 

In 2023, China changed course, importing zinc at an unprecedented rate. In June 2023, the country imported 45,329 tons of refined zinc, marking the highest monthly tally since May 2021. These abrupt shifts in import-export patterns raise questions about the stability of the global zinc market.

Factors Behind Stagnant Production

Chinese refined zinc production has remained stagnant in 2023, with a mere 1.9% increase in July 2023, according to data from the National Bureau of Statistics (NBS). The average monthly output from January 2023 to July 2023 lagged by nearly 7.7% behind the production in December 2022.

This stagnation can be attributed to two key factors:

• Output Cuts: Driven by lower hydroelectricity production in the first half of the year, Output cuts in Yunnan led to slowed zinc supplies.
• Proactive Approach: Zinc smelters adopted a proactive approach by constraining production due to the worsening outlook for demand from the property sector. Unlike previous years, Chinese zinc smelters refrained from building up excessive inventories.

West’s Surplus Story

While China grapples with stagnant production and fluctuating import-export trends, inventories at LME warehouses in the West have been on the rise, increasing by 18,875 tons this year. This suggests that, unlike in 2022, zinc is currently in surplus in Western markets. Consequently, the window for profitable zinc exports from China has narrowed.

Demand Slowdown

In light of these developments, the Chinese zinc’s import and export could become nominal and inconsequential for global zinc prices. The real story that holds sway over zinc market dynamics is the Western demand slowdown. This overarching trend is compelling international traders to divert surplus stocks into LME warehouses, marking a paradigm shift in the zinc market landscape.

OFB’s Insight 

The intricate web of factors influencing the zinc market, particularly in Chinese construction and global demand, presents a multifaceted challenge. Despite a contracting Chinese construction sector, zinc inventories remain enigmatic, refusing to conform to expectations. As the Western demand slowdown takes centre stage, the zinc market dynamics are undergoing a significant transformation. Understanding these complexities is key to navigating the evolving landscape of the zinc industry.