Analysts Weigh in on Chinese Zinc Data

Zinc prices trended lower this week, closing at US$2,003/tonne on the London Metal Exchange on January 9; that’s 2.3 percent lower than the previous month. Three-month zinc gained to $2,038 from $2,017 and stockpiles grew to 1,217,800 tonnes.

Positive export, import and manufacturing data out of China — the world’s largest consumer and producer of zinc — drove prices higher in the last weeks of December. Imports gained 6 percent in December and exports jumped 14.1 percent, both exceeding November’s gains and economists’ forecasts, data from customs administration shows, according to Bloomberg.

But confidence was not sustained, and prices have fallen on concern that the data does not signify a sustained economic recovery within the world’s second-biggest economy.

Reuters cited analysts who feel that the increased growth in exports was likely embellished by lower figures for the same period in 2011 and exporters clearing year-end orders. The same analysts said concerns about subdued global growth mean that China’s export spike may not signal an enduring recovery.

A weaker US dollar compared against a basket of currencies has also made commodities priced in the US unit cheaper for holders of other currencies, the Reuters piece adds.

Analyst predictions mixed

After a year that featured growing zinc stockpiles and volatile prices for the base metal, analysts are mixed on what 2013 holds for zinc prices and demand.

Analyst predictions for zinc demand focus heavily on China’s growing demand. But while the closure of key mines in 2013 means that a shortfall in zinc supply is anticipated, outstanding zinc stockpiles and uncertainty over global economic growth mean that the timing and impact of the supply shortfall remain uncertain.

Bullishness for the year is present within a number of research groups and is being driven by confidence in a re-energized Chinese and global economy.

“Zinc looks somewhat better than it did, as Chinese production levels seem to have moderated,” FCStone market analysts said in a research note shared by Platts.

Chinese zinc production also appears to be growing, with zinc prices hovering around the $2,000/tonne mark. That is allowing producers to make money.

“Chinese mine production has been growing like it’s going out of fashion,” Chris Parker, a market analyst with the UK’s Brook Hunt, told Platts.

But concerns remain, with bears voicing the concern that Chinese and European economic growth could keep zinc markets depressed in the months ahead.

Ross Strachan at Capital Economics told The Australian that despite signs that an economic recovery is coming from China, demand will remain lackluster due to existing high zinc stockpiles and a rebalancing of the economy away from manufacturing.

Production of steel — which zinc is used to strengthen — in Europe fell 8 percent last year and has dropped 29 percent over the past five years. That’s partially because economic uncertainty in Europe and weaker demand from China saw Luxembourg-based ArcelorMittal (NYSE:MT), the world’s largest steel producer by volume, idle nine of its 25 European blast furnaces, The Wall Street Journal reported.

Arcelor has incurred significant losses in response to stagnant European markets, writing down $4.3 billion in losses in the European market. The company also sold off $1.1 billion in Canadian iron ore assets late last month and has since sold an additional $4 billion worth of shares and convertible bonds to cover its balance-sheet shortfalls, Reuters reported this week.

Steel production has expanded in the emerging markets of India, China and South Korea in recent years, while contracting in the traditional markets of the US, Russia, Japan and Germany. Global production, which is slated to occur in the same emerging economies that drive the industry’s growth, is expected to grow at 3 percent in 2013.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.