Zinc Hits Highs on QE3, Chinese Stimulus

Chinese, American and Japanese stimulus have helped bump zinc prices to nearly their highest level this year following months of rising London Metal Exchange (LME) stockpiles and sliding refined metal prices. This elevation is expected to persist into the fourth quarter.

Base metals, including zinc, rallied earlier this month on reports of China’s US$157 billion infrastructure program and news of a third round of quantitative easing from the US Federal Reserve.

The Fed announced that it will buy mortgage-backed debt until the labor market outlook improves “substantially,” spending $40 billion a month with no set end date in the hopes of boosting US jobs numbers.

Zinc prices reacted positively to this news, with LME spot sales moving significantly higher and trading around the $2,105/metric ton mark on September 20, 17 percent higher than the recent lows hit in late July. Fourth-quarter prices should recede somewhat, according to a poll of Bloomberg analysts, averaging $2,045/metric ton, 10 percent higher than the average since July 1.

The number of cancelled LME zinc warrants — which indicate supply coming out of stock and into the market — has also increased substantially over the last few weeks, reaching an all-time high of 264,675 metric ton on September 19. The growing number of cancellations has added 63 working days, or three months, to the queue, which now stretches to almost 200 working days, the equivalent of 10 months, FastMarkets reported.

Alternative proxies of increased zinc demand have also appeared in Chinese demand for galvanized steel, which accounts for 47 percent of global zinc use. Spot steel prices in the world’s largest steel-consuming market rose by 7 percent from last week on expectations of stimulus spending, Reuters reported.

Overall, the promise of industrial stimulus spending has given a strong boost to zinc demand, and that has been reflected in both spot prices and cancelled warrants.

However, despite the substantial spending promised by both the Chinese government and the US Federal Reserve, demand support for zinc prices will be buffered by existing supply stocks and the timing and uptake of stimulus by Chinese and American industries.

Current increases in Chinese steel demand are helping buoy zinc prices, but manufacturing activity in China remains in a state of contraction. Recent manufacturing activity data — collected through the HSBC Flash China Purchasing Managers’ Index — shows that manufacturing is entering its 11th month of contraction, though it slowed slightly in September.

Beijing Antaike Information Development also stated that zinc production in China declined by 6.8 percent in the first seven months of the year, Bloomberg reported, a trend that is likely to continue. Currently, 79 percent of Chinese zinc producers have production cost levels of $2,526/metric ton, well above where zinc market prices have been for the past year. Many producers are likely to reduce production if prices remain below these levels.

Further, the zinc market continues to be dogged by extensive surpluses. Global zinc stockpiles recently gained 59,725 metric tons to reach 980,050 metric tons, some 20,000 metric tons below the recent high of over 1 million metric tons.

The principle unknown for the zinc market appears to be what impact stimulus spending from the US, China and Japan will have. While industrial-focused stimulus will help to increase demand and bring down zinc stock levels, it will be balanced by mine supply dynamics. Recent data released by the International Lead and Zinc Study Group indicates that due to mine output exceeding demand for the refined metal, global zinc stocks climbed by 135,000 metric ton for the January to July period of this year.

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