Warehouse inventories may have piled up globally but zinc prices will be supported by lower mine and smelter production in 2020, according to Hindustan Zinc (HZL). The restrictions imposed due the COVID-19 pandemic resulted in the disruption of mining and smelting activities.
HZL has deferred its production guidance for FY21 to the end of Q1 (June quarter) citing that the COVID-19 has given rise to uncertainties around demand recovery due to restrictions on movement of goods and people. The company is focused on sustaining normal level of production to overcome the pandemic situation and has adopted a wait and watch approach to figure out what lies beyond Q1. HZL has termed Q1 as a cold quarter.
In FY20, HZL’s total mined metal production dropped by 2pc to 917,000mt from the prior year while refined metal production stood at 870,000mt, down by 3pc from the year prior. All the major projects to build 1.2mn mt annual capacity was completed in FY20. The company suffered a 10 day loss in production in Q4, the company was on track to meet their guidance of 950,000mt for the year.
A detailed life of mine planning and feasibility strategy is being carried out in June which will increase HZL’s next phase annual growth to 1.35mn mt which will be elevated to 1.5mn mt finally. The company’s Fumer plant at Chandreya was to commence in May 2020 or by Q1 and will be ready for production. The Fumer plant will be for recycling waste from base metal extraction from smelter residues which offers an opportunity for HZL. The company is creating smelter residues to recover contained metals, including copper, lead, zinc, silver.
At the end of FY20, the company said that production was halted for 10 days due to COVID-19 but despite that the company achieved a relatively healthy quarter. The mines achieved high rate of production in Q4 and maintained a metal production rate of 1.13mn mt throughout the quarter despite the lockdown and were headed for record production before the lockdown began, said the company. If they continue to ramp up production with new phase growth in order, the company will deliver a strong operational performance in FY21.
Most of the company’s smelters resumed operations between April 8-15 except Rampura Agucha, HZL’s zinc and lead producer that restarted on April 20. Initial capacity input was around 25pc which gradually improved. Mine capacity reached 40pc utilization by the end of April while smelter capacity was 80pc. At the end of May, HZL’s mine and smelters are operating at 80-90pc of capacity compared to prior year, despite the absence of full workforce.
HZL’s mined metal inventories were exited on the higher side at 35,000mt because operations were curtained suddenly while a normal level would have been around 20,000mt. But by the end of June, inventory levels should achieve normalcy. During the lockdown phase, the domestic market in India was closed throughout April, while May was a little better, said HZl as exports picked up. Export markets are more robust than the domestic market under the current scenario, according to the company.
Slowdown in manufacturing activity due to lockdowns in China, which accounts for about 50pc of global demand and supply of base metals, impacted zinc and lead prices.
Zinc prices declined steeply in Q4 to touch multiyear lows to lower than $1,800/mt levels which then picked up in May on fundamental support. HZL believes that at the current prices of about $1,950/mt, around 15pc of high-cost mines could find it difficult to maintain positive cash flows which would result in production cuts on future prices, says HZL.
Several countries are contemplating plans to restart mines or resume normal production but have pushed back the idea. Global zinc mine production is expected to contract in 2020, Wood Mackenzie expects mine production to shrink by about 5pc. Chinese smelters resumed production during March end, while the rest of the world faced issues in operations due to lockdown and lack of availability of labour. Shortage of supply led to expectation that smelters would cut output which reflected in spot prices falling across China from $300/mt to $150/mt in the end of April, according to HZL.
In the end of May, weak demand was witnessed across all metals including zinc. Steel companies are ramping up production, demand for metals is picking up in China, auto plants are resuming production in UK and Europe. Over the next two quarters, demand should meet zinc metal supply, according to HZL. Warehouse inventories may have piled up but zinc prices will be supported by lower mine and smelter production in 2020.