zinc report by the economist

Moderators may remove the whole post if I posted it for copyright reasons, so I will just quote the main commemts.

If you want to read the whole report go to: Global forecasting services and register then check hard commodities, zinc demand and supply.

The analysis has a bit of a dry tone but if you read they key points they also indicate that the zinc prices have bottomed out and may only move up 10-20% before settling for most of 2012. This assumes weaker demand in Europe and the U.S. and average price in 2012 of 99 US cents/lb. Still that's 14% higher than where zinc prices are right now.

Demand:

However, lower prices since the sell-off in September appear to have triggered some Chinese bargain hunting, which has made the demand-side fundamentals of the global refined zinc market appear stronger in recent months. The Economist Intelligence Unit believes, though, that the driver is speculative restocking, not real end-usage, as the signals from the galvanised steel sector are not encouraging owing to tight credit availability and the government's other ongoing steps to prevent the economy (and the steel-intensive construction sector, in particular) from overheating. We have recently revised down our forecasts for economic growth in the US and EU and, reflecting this, we now expect global zinc consumption growth of 3.3% in 2012, as the impact of fiscal tightening in the mature economies takes effect. In 2013 we forecast a modest recovery in global refined zinc consumption, with growth rebounding to 4.9%.

Supply:

We therefore expect annual growth in global refined output to have eased to 2.6% in 2011 before averaging 3.8% in 2012-13, with most facilities operating back at close to capacity. However, growth in refined output could be slower if lower prices following the sell-off in September force a response from marginal producers as margins come under pressure. There are a growing number of reports of mines and smelters starting to reduce production during October, and we have trimmed our short-term expectations for Chinese production accordingly this month. Overall, however, China is still expected to remain the key driver behind future growth in both mine and refined production, as this is where the bulk of new capacity additions are located. The other key feature on the supply side of the zinc market is the capacity constraint outside China, with the notable exception of India, where output has been boosted by the latest in a series of new capacity additions by Hindustan Zinc.

Stocks & Prices

Some speculative consumer restocking in China and some price-related production cutbacks, also in China, may be rebalancing the global zinc market. They may even push the market into a rare supply deficit in the fourth quarter of 2011. Steady declines in both LME and SHFE stocks reinforce this view, with the cumulative drawdown amounting to a not insignificant 63,935 tonnes in October. However, we view this apparent tightening of the zinc market as temporary. We believe that production will once again be running ahead of consumption in early 2012 and forecast that this will remain the case, with global reported stocks rising from around five weeks of consumption in 2009-10 to just over seven weeks by the end of 2012. In 2013 a rebound in demand will produce the smallest market surplus since 2008, thus slowing the pace of increase in stock levels.

The late-September sell-off comprehensively broke the bottom of the 95-115 US cents/lb range that had held for the previous 12 months. The LME daily official zinc cash price plunged to a low of under 85 US cents/lb and fell again in October to 79.4 US cents/lb, its lowest level since July 2010. Although prices are likely to recover some of this lost ground, we now expect zinc prices to average just 99 US cents/lb this year, down from our previous forecast of 100 US cents/lb. We expect 2012 to be a year of consolidation, with increasing stocks leading to some price weakness. However, with the growth in stocks falling back in 2013, some upward pressure on prices will start to return, and we forecast a nearly 7% increase in the annual average price for that year, to 97.5 US cents/lb.