October 22, 2013 4:59 pm (Old story) Metal bulls pin their hopes on zinc as mines close
By Martin Sandbu in London
So you think the commodities supercycle is over? For zinc bulls, it may be just beginning.
The price of zinc has remained subdued since the financial crisis even as copper, gold and tin rose to record highs. But the metal, used to rustproof steel in everything from cars to building materials, has an increasingly vocal following among analysts and investors who believe that it could witness a sharp rally in the coming years.
“Certainly when you compare it to other metals, I would say the outlook for zinc is one of the most constructive,” says George Cheveley, a metals and mining portfolio for Investec Asset Management.
Wood Mackenzie, a leading consultancy, predicts that zinc prices will average more than $3,500 a tonne from 2016-18 – compared with just $1,940 so far this year.
After years of falling prices, a zinc boom could deliver sizeable profits to large miners such as Glencore Xstrata, the world’s biggest producer and trader of zinc; Canada’s Teck; and trading houses such as Noble Group, which have carved out positions in the market.
The bullish argument is based on the expected closure of a number of large zinc mines – together with a lack of new projects ready to replace them. Unlike copper and iron ore, where a wave of new supply is poised to hit the market after mining companies spent billions on new projects and expansion, years of relatively low zinc prices have disincentivised investment.
“There is likely to be a structural deficit in the zinc market in the short to medium-term future,” said Daniel Maté, head of zinc trading at Glencore Xstrata and one of the trading house’s top shareholders, at an investor briefing last month.
At issue is the closure of some of the world’s largest zinc mines. Brunswick and Perseverance in Canada, owned by Xstrata, closed this year. Then late next year Vedanta is planning to close Lisheen in Ireland, among the dozen largest global mines. And in 2016 the world’s third-largest zinc mine, Century in Australia, is due to cease production.
At the same time, there are few large-scale zinc projects ready to fill the gap left by these closures. And those that exist are suffering delays. On Friday, MMG, the international mining arm of Minmetals of China, said its Dugald River project in Australia was “unlikely”to meet a previously announced plan of starting production in 2015.
“We are in an environment in which mining companies are reviewing, deferring or cancelling potential projects generally,” says Sanjay Saraf, head of base metals research at consultancy Thomson Reuters GFMS.
“More than 2m tonnes of new supply is needed by 2016,” argues Mr Maté of Glencore Xstrata. “There is a real shortage of quality projects in the pipeline which are anywhere near ready for production.”
Even if the outlook for zinc looks bullish on paper, some traders and analysts remain sceptical.
First, inventories are very high. Stocks of the metal in London Metal Exchange-registered warehouses stand at 1.1m tonnes – close to a record high touched in 1994. And traders and analysts estimate that significant inventories of both zinc metal and ore are held at other warehouses and ports.
“There are lots of stocks sloshing around,” says Leon Westgate of Standard Bank. This marks a difference from zinc’s previous boom in 2007 when prices touched $4,580 a tonne. “If you look at stocks in 2006, you were looking at 2.6 weeks of consumption or thereabouts.” Today he estimates enough zinc is hoarded to cover about 10 weeks of demand.
More than 2m tonnes of new supply is needed by 2016. There is a real shortage of quality projects in the pipeline which are anywhere near ready for production - Daniel Maté, Glencore Xstrata
Then there is Chinese production. China is the world’s largest zinc producer, accounting for about a third of global mine production. Some analysts and traders believe that Chinese miners could respond rapidly to any rise in prices, boosting production and calming the market.
Gayle Berry, analyst at Barclays, describes Chinese output as “the big wild card” for the zinc market. “Chinese mine production has continued to outperform expectations in the last few years,” she says. “When we see this level out, it will be constructive for zinc prices.”
As one trading house executive puts it: “The bull story has moved from possible to plausible. But I would still not call it probable.”
TRF Price at posting:
9.7¢ Sentiment: LT Buy Disclosure: Held
