Zinc is one of the most widely used base metals in the world, known for its ability to resist oxidation and corrosion. The metal appears a lustrous bluish-white and holds a number of beneficial physical, electrochemical and chemical properties that allow for it to be used in a variety of applications. Zinc is chemically active and alloys readily with other metals such as copper, aluminum and magnesium. Zinc also reacts readily with iron when used for galvanizing, which imparts desirable characteristics such as strong corrosion resistance and high durability. Zinc is a relatively hard metal with a low melting point, making it and its alloys ideal for die casting while remaining malleable enough to be formed, rolled or extruded, according to the International Zinc Association (IZA).

According to the IZA, zinc is the 23rd most abundant element contained within the earth's crust (averaging 70 ppm) and is mined in over 50 countries worldwide. Zinc ore bodies are formed in various tectonic environments and at different temperatures and pressures, which causes significant variability in the properties of ore bodies found across the world. Eight main ore body classifications exist to account for this variability: sedex, volcanogenic massive sulfide ("VMS"), oxide, carbonate replacement, Mississippi valley type ("MVT"), epithermal and mesothermal and other miscellaneous hydrothermal. According to the IZA, the most prevalent of these deposits are sedex, which are critical sources of global zinc supply. Sedex deposits are typically found in sedimentary rocks, particularly shales, with mineralization that exceeds 100 Mmt and with grades of 10% to 20% Zn. VMS deposits are also common and widely distributed across the globe. They tend to be smaller than sedex deposits but often have a higher by-product presence (copper, lead and silver). MVT deposits tend to be smaller and lower grade (2% to 6%), but often occur in clusters within a single district. Few oxide deposits of zinc are known.

Zinc ore is generally extracted as a co-product with other metals, most notably copper, lead, gold and silver. Zinc ores commonly contain approximately 5% to 15% Zn and are most commonly found as the zinc mineral sphalerite, also known as zinc blende. Zinc blende accounts for over 95% of zinc produced globally. According to the IZA, zinc production is sourced from both underground and open pit operations. On a production volume basis, the IZA estimates that underground operations account for 64% of global production, combined underground and open pit operations account for 21% and open pit operations account for 15%.

Once ore is extracted, it is crushed and ground to separate it from other minerals, and is then typically concentrated using the froth floatation method. The IZA estimates that this yields a zinc concentrate containing between 45% and 55% Zn. According to the IZA, the contained zinc can be recovered using either pyrometallurgical or hydrometallurgical techniques, though roughly 90% of zinc is produced using the latter method. The zinc produced by the hydrometallurgical process has the advantage of being high grade (99.99% Zn), whereas a further distillation process is needed to achieve this grade from the pyrometallurgical technique. However, the pyrometallurgical technique may be used on a wide range of materials, particularly mixed zinc-lead bulk concentrates. Zinc metal is marketed in three grades depending on its purity: Special High Grade (99.995% Zn), High Grade (99.99% Zn) and Good Ordinary Brand (98.5% Zn).

Click here to see the latest ILZSG (The International Lead and Zinc Study Group) monthly data on zinc supply and demand

Global Top 20 Producing Primary Zinc Mines by Zinc Reserve Grade Perkoa, Burkina Faso (Trevali) 15.2% Red Dog, Alaska, USA (Teck) 15.0% Rampura Agucha, India (Hindustan) 13.9% Kayar, India (Hindustan) 13.4% Illapa, Bolivia (Combiol / Glencore) 10.1% Jaguar, Western Australia (Independence) 9.5% McArthur River, Australia (Glencore) 9.4% Empire State Mine, New York, USA (Titan) 9.2% Skorpion, Namibia (Vedanta) 9.0% San Vicente, Bolivia (Minera San Ignacio) 8.9% Rosh Pinah, Namibia (Glencore) 8.8% Langlois, Quebec, Canada (Nyrstar) 8.6% Rosebery, Australia (MMG) 8.3% Mt Isa Zinc, Australia (Glencore) 8.2% Pend Oreille, Washington, USA (Teck) 8.1% Sinchi Wayra, Bolivia (Glencore) 8.1% Aguilar, Argentina (Glencore) 7.6% Santa Eulalia, Mexico (Southern Copper) 6.9% Matagami, Quebec, Canada (Glencore) 6.8% Rajpura-Dariba, India (Hindustan) 6.3% Tara, Ireland (Boliden) 6.3%

According to the January 2016 United States Geological Survey (the "USGS") Zinc Commodity Summary, the vast majority of global zinc supply is sourced from China, though Australia and Peru are meaningful producers as well. According to the USGS, many of the world's largest zinc mines are located in Latin America and the United States, though the largest zinc mineral reserves are in Australia, China and Peru.

As all mines have finite lifespans, new projects must be constantly identified and developed in order to maintain balance in the global zinc markets. However, determining whether or not an identified project can be advanced to production is very complex. While many zinc deposits have been identified as potential sources of future supply, the decision to proceed with production requires the completion of significant geological, financial and environmental diligence. Due to these extensive diligence requirements, new mine production typically requires long lead times.

Commodity fundamentals can also have an impact on currently producing operations. For example, as a result of thin zinc margins through 2015, on October 9, 2015, Glencore PLC announced a 500 kmt per annum cut to zinc production. This represented approximately 4% of refined zinc metal production in 2015, based on the ILZSG global supply estimate for 2015.

First Uses of Zinc Galvanizing 50% Die-Casting Alloys 17% Brass & Bronze 17% Zinc Semi-Manufacturing 6% Chemicals 6% Misc. 4%

Source: The International Lead and Zinc Study Group (ILZSG)

According to the ILZSG, galvanizing is the predominant first-use for zinc due to its ability to provide a protective barrier against corrosion. Galvanized steel is most commonly used in the automotive industry where it permits automakers to reduce costs and body weight without compromising safety or appearance. Outside of the automotive industry, the alloys Galfan and Galvalume are used in niche markets. Galvalume, a zinc-aluminum alloy comprised of 45% zinc and 55% aluminum, is used in construction to improve corrosion resistance of unpainted surfaces. Galfan is a similar zinc-aluminum alloy, however, it has an additional 5% of aluminum. A benefit of the additional aluminum content is that it has improved formability, making it more useful for architectural purposes than other zinc coatings. While galvanizing has long comprised the largest first use consumption of zinc, China Minmetals Corporation has stated that it has also been the fastest growing area of zinc consumption, heavily driven by China's infrastructure, power and communication boom.

According to the IZA, die-casting alloys are used extensively in the automotive and residential construction sectors with growing demand for use in business machines, toys, bathroom fittings, electrical appliances and domestic appliances. According to the IZA, zinc alloys have traditionally been preferred due to their strength, innate hardness, self-lubricating properties, dimensional stability, and excellent thermal and electrical conductivity. As such, zinc die-cast alloys are the second most common first-use of zinc globally, according to the ILZSG. Recent advances in technology have also led to new zinc-based materials, such as zinc foams, that can be die-cast in ordinary die-casting machines at the same price as conventional zinc die-castings, but result in parts that are approximately 30% to 50% lighter.

Brass is an alloy of copper and zinc, usually made up of 65% copper and 35% zinc, though the exact mix depends on the desired properties of the alloy. Brass is cheap and easy to produce but attracts a high price as it can be cast, forged, and formed into sheets, wires and rods. Due to its high tensile and yield strength, brass is also machineable and therefore can be used to produce complex shapes. Brass is widely used in hydraulic and electrical components due to its conductivity, non-magnetic propensity and corrosion resistance. It is also used widely in the plumbing industry to create complex and durable pipes and joints, as well as in the automotive industry as a component of fuel, electric and braking systems.

Zinc is also used in chemicals, such as zinc oxide. According to the IZA, zinc oxide is primarily used as a vulcanizing activator in the rubber industry, where it is critical to the production of tires. Zinc oxide is also widely used in ceramics, where it is used to produce frits, artistic glasses and enamels. Other uses for zinc oxide include as a pigment in paints and as an ingredient in sunscreen, baby creams and wound-care ointments. One potential future growth area for the use of zinc is as a micro-nutrient in fertilizers. According to the IZA, research shows that the addition of zinc can lead to a significant boost in crop yields, which has the potential to dramatically increase zinc consumption if widely adopted.

According to the IZA, the final primary first-use for zinc is in semi-manufacturing of rolled and extruded products. These products are in turn used in a variety of forms across the globe. For example, zinc sheets are commonly used in the building industry as roofing and cladding material, as well as coinage and as battery cans. According to IZA, the largest end-use sector for zinc is construction, with galvanized steel being used extensively in various infrastructure projects including bridges, electricity transmission towers and lighting poles.

According to the IZA, the second most important end-use sector is transport, followed by consumer products and the manufacturing of industrial goods and equipment. In the 2016 edition of its capital projects and infrastructure spending report, PricewaterhouseCoopers LLC. forecasted global infrastructure spending to grow at a rate above 4% per annum from 2017 to 2020.

The most common process used for smelting and refining zinc is hydrometallurgical, commonly referred to as the electrolytic process or RLE. According to the IZA, this technique accounts for over 90% of all concentrate treated globally. The other technique in use is pyrometallurgical, which includes blast furnace, electrothermic and vertical retort smelting and refining.

Smelters and miners have ongoing relationships (where not vertically integrated) and will continuously negotiate private contracts at a variety of rates. Smelters purchase concentrate under annual or multi-year tonnage based contracts, but will also purchase concentrate on the spot market in order to fill their plants should supply be limited. Smelters may also treat secondary feed materials such as zinc oxides. Based on the public filings of major smelting operations, under a typical commercial smelting contract, the smelter pays the seller for 85% of zinc contained in concentrate and receives any metal above that recovery, known as free metal.

Treatment charges are paid by the concentrate seller as a charge for the treatment of the zinc concentrates, typically quoted in United States dollars per tonne of concentrate. The contract between the smelter and the seller typically provides a base treatment charge at a base zinc price that will escalate and de-escalate as a result of movements in the zinc price over the quotation period, effectively acting as a form of price participation by smelters. These terms are negotiated between the smelter and seller and will fluctuate year to year. In a given year, treatment charges will generally settle around precedents established by major buyers and sellers of concentrate at terms referred to as the benchmark treatment charge. A strong view on supply and demand over a one year time horizon, and therefore zinc price, is essential to these negotiations. A spot treatment charge exists for the sale and purchase of certain parcels of concentrate that become available to the market during the course of a year and can provide an indication of the supply and demand balance for zinc concentrates at a specific point in time. The market for spot treatment charges is much less liquid than the one that exists for benchmark treatment charges.

When the supply of concentrates is low, miners gain bargaining power on pricing. This is currently evidenced by the loss of price participation for zinc smelters, which is a mechanism that allows smelters to see upside when zinc prices move above a basis price and mitigates downside risk to miners if it goes below that basis price. While price participation was not explicitly removed from contracts, price escalators and de-escalators have been set at zero for 2017, an outcome which miners have been negotiating for a long time.

Over the past five years, the LME spot zinc price has ranged from a low of $0.66/lb to a high of $1.41/lb. This range is significantly below prices observed in 2006, which peaked at $2.09/lb on November 24, 2006, and which suggests that there is room for price appreciation should fundamentals support a price increase. As a base metal, zinc prices are much more driven by supply and demand fundamentals than trading speculation. Thus, the decline of global zinc inventories over the past few years, which effectively tightened supply, could be perceived as a contributing factor to the rally in zinc prices since the beginning of 2016. Historically, the price of zinc has moved inversely compared to inventory levels and has displayed significant upward increases when inventories reach critical levels, as witnessed in 2006-2007.

The two main sources of zinc pricing are the LME and the SHFE. The LME official cash price is set through open outcry trading on the floor of the LME. Each metal trades in five minute ring sessions which are said to be representative of global supply and demand. The last bid and offer price quote during the second ring trading session for zinc metal is set as the LME official cash price for zinc for that particular trading day. The SHFE price is representative of the supply/demand balance in China as it is the typical exchange for Chinese commercial transaction.