Zinc market participants got a pleasant surprise this morning when Reuters reported that three-month zinc on the London Metal Exchange (LME) was at $2,155 per tonne, its highest price in 16 months.
The news outlet notes that the increase seems to have been spurred by data indicating that the zinc deficit is growing. It states that from January to March of this year, the global zinc market recorded a deficit of 17,000 tonnes; however, from January to April, the deficit came to 107,000 tonnes, a fairly steep increase.
The fact that the zinc price seems to have been moved by talk of a deficit is interesting given information recently relayed to Zinc Investing News by Doug Ramshaw of McLeod Williams Capital. He said last month that though the International Lead Zinc Study Group reported that the zinc market technically went into deficit at the end of 2013, that news hadn’t yet made much of a splash because “people are looking at zinc inventories still and seeing how high they are.” Indeed, he said, they sat at 786,000 tonnes just prior to the end of April.
So why is deficit talk now moving zinc prices?
Put simply, there’s more to today’s price increase than the deficit data cited by Reuters. The other key factor is that LME zinc inventories are down — the Financial Times reported last week that they have dipped to 694,650 tonnes, their lowest level since 2010. According to Stefan Ioannou of Haywood Securities, that’s significant because “about 60 percent of the world’s zinc is held on the LME. When you look at the LME inventory number and it’s declining, it’s a good indication that global zinc supply is falling.”
However, a quick glance at Kitco’s five-year LME zinc warehouse stocks chart indicates that inventories have in fact been on the decline since about midway through 2013:
As the chart indicates, LME zinc stocks may recently have reached their lowest level in about four years, but their downward movement is no recent trend. That raises the question of whether today’s price rise is an anomaly.
If Leon Westgate, base metals analyst at Standard Bank, is to be believed, the answer is yes. He commented to the Financial Times, “[t]he supply gap that will emerge has excited some people, but that’s still over the horizon. I think it’s a bit soon for the price to start moving, and that this rally is not really justified.”
When to buy?
Whether zinc’s current price rise is premature may be up for debate, but even Westgate appears to believe that zinc has a good long-term outlook. So when should investors start buying?
Many, like Ramshaw, believe “the smart money … is already in zinc,” so there’s no time to waste. Others, however, are a little less certain. MetalMiner’s Raul De Frutos believes investors should wait until zinc breaches $2,200 per tonne before going long. While that “might seem contradictory” given that buying when prices are low is typically the best bet, he asserts that “if prices manage to break above resistance levels, that’s the moment with the highest probability of Zinc surging.”
Certainly, zinc prices will merit close attention in the coming weeks.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Investing in zinc? Zazu Metals Corporation (TSXV:ZAZ) holds a 50% interest in the Lik Project in Alaska, a joint venture with Teck Resources Limited. The PEA on Lik South estimates that 17.1Mt tonnes of ore milled at an average grade of 7.7% zinc, 2.6% lead and 47 g/t silver would come from the Lik South project.
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