Plugging Western Supply Gaps - China Leads the Way with Zinc and Lead Exports

China: Last year, China became a net exporter of refined Zinc for the first time since 2007, a significant shift from its historical trade patterns. This rare reversal is due to a shortage in the availability of metals across the world. Additionally, exports of refined Lead were exceptionally strong for a second consecutive year.

Lead and Zinc, the sister metals of the geological formation world, often occur near one another. When a mine yields Zinc, it's highly likely that Lead will be found too.

However, while they may start off together, these two sisters typically go their separate ways during the production phase. Unfortunately, recently there have been several smelter outages that have caused a mutual scarcity for both metals - this has driven up premiums and caused exchange stocks to reach lower levels than usual.

China's exports of refined Lead last year reached the highest levels seen since 2007, with a total of 116,500 tonnes exported and only 1,500 tonnes imported - making the total net export volume 210,000 tonnes since 2021. It is important to consider whether China will need to come to the rescue of Western buyers again this year.

In the past four years, China has been a net importer of Lead overall. However, in December, high physical premiums in Europe and the US caused refined Lead exports out of China to surge - 16,400 tonnes had departed, with some individual destinations such as Germany (1,600 tonnes), Belgium (1,000 tonnes), Italy (1,000 tonnes), The Netherlands (1,000 tonnes) and Turkey (1,000 tonnes) receiving notable amounts. Cumulatively over this time 43,000 tonnes were exported.

China's net exports of refined Zinc totaled 1,700 tonnes last year - a figure that might not seem remarkable on its own. But it tells the story of an extraordinary shift in global trade patterns. Export shipments reached 80,900 tonnes - their highest level since 2015 - and were distributed among unlikely recipients such as Turkey, Mexico, and the United States.

Global Zinc imports have seen a massive decrease in 2021, with 79,000 tonnes being imported - significantly lower than the 434,000 tonnes from the previous year. Even this tally is the lowest in a decade, compared to the high of over 700,000 tonnes of refined Zinc being imported as recently as 2018.The shift in imports away from China is largely attributed to refineries being re-routed towards tight European and U.S. markets instead.

Zinc production in Europe has been hit hard recently, with three smelters shutting down due to high power prices. Other smelters are also facing reduced output as a result.

Glencore has put two of its smelters in Germany and Italy on care and maintenance. As for Nyrstar owned by Trafigura, the company has closed its French plant at Auby and is operating its Dutch plant at reduced levels. The major issue in terms of Lead supply right now lies with Stolberg smelter in Germany which was recently flooded in 2021 but is now fixed and waiting for approval from regulators to be sold to Nyrstar before operations can start again.

Zinc production has been disrupted in multiple countries due to a variety of issues. Plant maintenance in Canada and Australia, as well as logistical problems in Kazakhstan, have caused Lead refinement to take a hit. Mexico and Canada's Valleyfield plant has experienced cellhouse instability, and long-term closures of certain plants are hindering Zinc production too.

After more than 25 years of activity, the Flin Flon Zinc smelter in Canada finally halted production in 2022. The closure was well-anticipated and planned for. In contrast, the sudden closure of the Florence secondary Lead plant in South Carolina came as an unexpected shock to the U.S. supply chain in 2021.

The Zinc smelter market in Europe is set to recover soon, and that could have a significant impact on the West's supply of the metal. The Stolberg Lead smelter's future depends on decisions from German regulators, while the overall recovery in European smelters will depend greatly on changes in the power market. Zinc smelters are already profitable and European operating rates are expected to improve from 71% of capacity up to 87% during the second half of 2023. This should have a positive effect on global Zinc markets and benefit those with investments in the metal.

Zinc inventories are on the rise as smelters struggle to keep up with demand. This is reflected in the current spot treatment terms reaching $250-280, a huge increase from last year's benchmark of $230 per tonne.

Global Zinc imports have seen a massive decrease in 2021, with 79,000 tonnes being imported - significantly lower than the 434,000 tonnes from the previous year. Even this tally is the lowest in a decade, compared to the high of over 700,000 tonnes of refined Zinc being imported as recently as 2018.

2022 was a difficult year for Lead and Zinc production, as disruption at smelters around the world combined with falling production to bring severe shortages. However, the latest base metal poll suggests that there could be a turnaround in supply dynamics in 2023, with analysts predicting a return to Lead surplus this year, and Zinc surplus next year.

If China is the first to capitalize on the surplus in Zinc and Lead, last year's imbalances between East and West could remain for an extended period. Even more importantly, new trade flows from China may become a permanent part of the global market. However, which region can respond fastest to the supply-demand equation will heavily influence how soon the surplus is distributed.