Tight supply at zinc mines puts increased pressure on smelters: BofA By Investing.com

Investing.com — The market is currently being challenged by tightening mining supply, which has put increased pressure on smelters globally.

According to analysts at BofA Securities in a note dated Wednesday, the situation is critical as it affects both zinc production and the profitability of smelters, especially those in China and ex-China.

The zinc market went into deficit due to a sharp drop in mine supply. BofA Securities notes that this trend is driven by several factors, including a lack of new mining projects and reduced production from existing mines.

“For example, Teck contributed 5.4% of global zinc mine supply last year, but its market share will only reach 3.2% by 2027 due to declining supply from Antamina and Red Dog,” they analysts said.

This reduction in mine supply has resulted in a significant tightening of the concentrate market, where zinc smelters source their raw material. The shortfall is reflected in treatment charges (TC), which have fallen to near historic lows.

TCs are the fees that smelters charge miners for processing zinc concentrates into refined metal. The sharp decline in TC highlights the scarcity of available concentrates and underscores the challenges smelters face in maintaining profitability.

The tightening of mining supply has created an increasingly difficult environment for smelters, particularly in China and the former China regions.

“While operators are still profitable on annual contracts to 2024, they are making losses if they purchase commodities on the spot market,” the analysts said.

The zinc concentrate spot market has tightened significantly, leading to lower TCs and higher costs for smelters.

BofA Securities anticipates that TCs in the 2025 annual contracts will likely decline further as spot market availability continues to tighten.

This downward pressure on TC is expected to intensify financial pressure on smelters, which may lead to further reductions in zinc production as unprofitable operations close or reduce production.

The current supply constraints in the zinc market are part of a larger trend affecting several base metals, including . Project emptying and capital spending cuts in the mining sector over the past decade have led to structural supply problems that are unlikely to be resolved quickly.

This has major implications for the global zinc market, where demand continues to grow, driven by sectors such as construction and green technologies.

Moreover, the situation is complicated by China’s dominant position in the global zinc supply chain. As a net importer of zinc concentrate and refined zinc, China has the capacity to absorb much of the available supply, leaving less for smelters in other regions.

This has led to concerns that Western smelters may struggle to compete, especially if Chinese smelters continue to operate despite the difficult economy.