Tuesday, May 27, 2014

Could Zinc Be The Next Base Metals Star?

A combination of Indonesian ore restrictions, and fears over possible trade sanctions on Russian miners, has seen nickel emerge as the base metals suite's darling during 2014. The metal has advanced 40% since the turn of the year, breaching 27-month peaks above $21,000 per tonne in the process, and more strength looks on the agenda as these supply concerns rumble on.

But for many, a backcloth of declining supply levels is also expected to propel zinc prices skywards in the near future. Bank of America-Merrill Lynch expects the galvanising metal to breach $2,400 per tonne as soon as next year, a sizeable 15% improvement if realised and with many tipping further price growth further out.

Market deficit poised to worsen in coming years

Like nickel, the zinc market is beset by worries over production levels over both the short and near term. However, wider macroeconomic fears have constrained zinc's price performance in recent months, and prices are essentially flat from those recorded at the start of 2014 around $2,100 per tonne.

Still, a spate of mine closures scheduled from the middle of next year looks set to become an increasingly-significant price driver. MMG Limited, one of the planet's biggest zinc producers and owner of the Century mine in Queensland — by far Australia's largest zinc project — expects zinc production from the asset's open pit to range between 465,000 and 480,000 tonnes this year.

This marks a significant decline from 488,233 tonnes in 2013 and 514,707 tonnes in the previous year, and last output from the project is anticipated during the middle of 2015. This downtrend is mirrored by numerous other major projects across the globe. On top of this, the effect of reduced commodity prices on capital expenditure across the mining community is stymieing the development of the next generation of 'super projects.'

Meanwhile, a steady improvement in the global economy continues to bolster demand for the metal, which is used predominantly in battery production as well as to coat iron and steel to protect against corrosion. Galloping automobile demand in emerging markets, in addition to resurgent car sales in Western Europe and North America, has proved pivotal in driving zinc demand higher.

And significantly, a backdrop of rising construction activity in China — the Asian country is responsible for almost half of total zinc consumption — and surging domestic demand for electrical goods also bodes well for metal prices. Indeed, the International Lead and Zinc Study Group (ILZSG) estimates that Chinese apparent demand rose 7.6% last year versus 3.4% in the US and 4% in Japan.

Latest forecasts from metals specialists Sucden Financial and FastMarkets point to a 5% improvement in zinc demand in 2014, to 13.6 million tonnes, outstripping an anticipated 4% output advance to 13.5 million tonnes. These figures push last year's market deficit to 120,000 tonnes from 68,000 tonnes in 2013.

This trend of buoyant consumption outstripping production increases has been the story of the zinc market during recent years — next year's projected deficit compares markedly with oversupply of 375,000 tonnes in 2011, based on ILZSG figures, and 248,000 tonnes in 2012.

Although zinc stocks remain relatively plentiful — material currently held in London Metal Exchange warehouses currently stands at around 735,000 tonnes — levels have collapsed 25% during the past six months and now stand at their lowest since the autumn of 2011.

Of course the prospect of vast quantities of zinc being released onto the market from China is a very real threat, as the metal's role as collateral for a range of financing activities comes under greater regulatory scrutiny.

But as global metal consumption looks set to gallop steadily higher, and output from key mines is not likely to be replaced for some time, in my opinion zinc looks set to enjoy solid long-term price appreciation.

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