By Michael Montgomery—Exclusive to Zinc Investing News
The price of zinc has been falling. Prices on the LME as of March 8, have dropped to $2,349.00 per tonne [cash buyer], making it the weakest performing metal on the exchange. According to Kitco, zinc spot has been falling since Feb. 21 when the price was $1.1585 per pound, to $1.0687 per pound. The price has a long way to slide before hitting the $1,000 per tonne lows of 2009.
Oil prices continue to be a factor for many base metals, as inflationary fears temper the market. The major concern in the zinc market comes down to fundamentals. Currently, there is a large surplus of the metal in China and London. Analysts predict a surplus of zinc for 2011 of upwards of 750,000 tonnes.
Over the course of the year, the picture for zinc doesn’t look promising. Analysts with Barclays Capital released a technical analysis predicting a fall in price of as much as 5.9 percent and risks falling to $2,250 per tonne. “We are hanging on to the bullish view, but we are getting more worried… zinc may rebound toward $2,900 a ton if industrial metals continue to climb,” the Barclays Capital report shows. The 5.9 percent drop in price predicted by the firm has already come into reality as stock of zinc climb on the LME, with little demand to buoy prices.
Stocks of zinc in the LME have continued to grow despite the weak prices. “We’ve had fairly sizeable deliveries into the LME warehouses in the past few days, taking stocks up to 734,000 tons, It’s quite a dramatically oversupplied market,” said David Wilson, director of metals research at Societe Generale. Wednesday, the metal continued its dive as prices for 3 month delivery fell to $2,275 per tonne, from $2,395 on Tuesday; a drop of more than 6 percent. If the earlier mentioned Barclays prediction is correct, the zinc market may currently be in the midst of this year’s low price.
Peru, the world’s second largest producer of zinc, has stated that the country will increase production over the next three years. However, in January, production fell to 121,424 tonnes down 2.9 percent for the month, year-over-year. The drop in production may bring some of the fundamentals back in line; however, it could be a case of too little too late.
There are small signs that prices for the metal may be at a bottom. In India, the price inched marginally higher at a mere 0.09 percent. Zinc prices in China also picked up fractionally, by 1.3 percent, although the price had fallen 5.2 percent the previous day. We will have to wait and see if these modest gains in the response to the larger drop in price represent a true change in demand or just a momentary correction.
While refined zinc is seen to be in a massive surplus for 2011, zinc concentrate is in a deficit going forward. There may be signs of an emerging shortage of concentrate as capacity at refineries increases faster than mine supply. This factor may be a good sign that the bottom is likely near.
“2011 will likely be the first year in which the gap between supply and demand for zinc concentrates will limit refined production . . . Simplistically, smelters will not be able to produce what they plan to, they will be forced to operate at lower utilisation rates,” stated Andy Roebuck, Market Researcher for Teck Metals.
Speaking at the PDAC conference in Toronto, Roebuck stated that he expects a surplus this year for refined zinc; however, the market may come into balance in 2012, and a deficit in 2013. The change from surplus to deficit is attributed to the lack of zinc concentrate headed to refineries. Stockpiles in China have jumped by as much as 40 percent, and the story is the same on the LME. Demand for the metal will have to increase significantly to use up the stockpiles over the course of the next two years. Stay tuned to see if the supply and demand fundamentals come into a more healthy balance.
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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