A ‘pinch-point‘ is the level of inventories of a commodity or product below which consumers of that commodity or product become concerned about security of supply. When inventories are below the pinch-point, small changes in the balance of supply and demand can cause large changes in the price of the commodity or product.
Inventories are best expressed as a ratio of a period of consumption, say as days, weeks or months of consumption, rather simplistically as tonnes. That ratio then puts the absolute size of inventory into context with market demand.
Each commodity market becomes ‘tight’ at its own (low) level of inventory. The position of the pinch point curve may shift according to the economics of each cycle, that influence at what level a market is considered ‘tight’.
Teck (20180226) presented data for two recent cycles of tightening zinc markets illustrating that each cycle may travel a different path, but perform a similar pinch-point shape.
Several major zinc mines closed in the last 4-5 years, as their Reserves were exhausted. To date we have not seen sufficient potential new mine supply to indicate that the closed supply volumes will be replaced in the near term. There are also no known ‘major’ new deposits able to come on line within the next 6-10 years, the minimum time it takes to discover and develop a new major mine now. Industry analysts also consider that the sum of all the potential new ‘small’ deposits is insufficient to replace the recent major closures. The outlook for zinc is one of tight supply.
Additionally, for those that believe that the advent of electric vehicle (EV) uptake will mean a near term demise of demand for lead-acid batteries will result in significantly lower prices for lead, the fact that lead is often a co-product or by product of zinc production might reduce the economics of some Zn-Pb mines. This means that confidence in the economics of a zinc mine could be best assured if it is (a) Zn only, or (b) Zn-Cu, rather than Zn-Pb and is reliant on Pb for economic development. This could mean a shift to a preference for targeting either ‘sedex’ (sedimentary hosted) or VMS (volcanogenic massive sulphide) deposits.
However the range of forecasts for uptake of EVs ranges widely, with some more conservative participants (BHP, Wood Mackenzie et al) forecasting continued growth in Pb-Acid battery demand, albeit slower, to 2030 or 2040, with EVs achieving a 40% share of the global light-vehicle market in those time frames. Forecasting high growth rates is always difficult, particularly matching high growth forecasts of supply and demand. We expect the ramp up phase(s) will have volatile pricing.