Zinc has been the Cinderella story of base metals recently but alas there hasn’t been any pumpkins arrive at its front door to take it to the ball.
Just when zinc was starting to get a few come-hither looks from world market analysts it has been hit by global financial storm and European gloom, which has sent any potential suitor look elsewhere.
If zinc does have anything going in its favour it would be the number of large mines set to close around the world causing a tightening of global stockpiles.
In a recent Metals Market Comment note BNP Parabis noted four prominent zinc mines that are about to meet the end of their run and four others that were scheduled to downsize production over the next few years.
The mines which are due to close produced over one million tonnes of zinc in 2010.
Those downsizing could possibly produce at least 300,000 tonnes less in 2014 than they did in 2010.
“As we have previously noted, however, the consequent big production losses will not begin in earnest until 2013,” BNP Parabis said.
“And meanwhile, there is plenty of scope for world mine output to continue growing, albeit not at the near eight per cent pace of 2010.”
The Global Financial Crisis of 2008 saw a number of mines cutback production, which continued throughout 2009.
Many of these closures are being reversed and as they continue it is expected global output of zinc will be given a bit of a leg-up moving into 2012.
The likely scenario we will see next year will be more of these restarts combined with a number of new, medium-sized mines are scheduled for start-up between now and 2013.
“Together with lofty lead and silver prices, the zinc price is still high enough to encourage continued production growth,” BNP Parabis said.
“Indeed, the zinc price is further up the cost curve than those of aluminium and even nickel.
“We forecast that as long as the zinc price does not fall sharply, world mine output will increase by about nine per cent between 2010 and 2012, and that it will continue to rise even in 2013.”
According to ABN AMRO Bank N.V. and VM Group London Metal Exchange warehouse stocks of zinc were sitting at 0.84 million tonnes as at 12 September, while those held by the Shanghai Futures Exchange totalled 0.41 million tonnes.
“Total zinc stocks, including those held by consumers and producers, stand at about ten weeks’ worth of global consumption, the highest since the 1990s,” the banking group said in its Metals Monthly newsletter for September 2011.
VM Group said it had been surprised by the performance of the price for zinc since the start of August, recording a rise of one per cent, to around $US2,200 per tonne.
Aluminium and tin recorded declines for the same period, while copper and nickel earned modest gains.
The only metal within the base metals group to perform better than zinc was lead.
“That said the zinc price did come under pressure in early August, falling to a low of $2,034 per tonne, only to rally later that month as risk-on risk-off sentiment based on EU and US debt and growth concerns roiled the markets,” VM Group said.
The increasing amount of zinc inventory tied up in warehouse financing term deals and a good deal of the remainder held in the LME’s New Orleans holding sheds has also been cited as a bullish factor for the metal.
This has resulted in a premium being paid for LME-grade zinc hitting premiums of $US130 per tonne, an increase of around $US10 per tonne from the beginning of the year and $US20 per tonne more than the nadirs of February and April.
“These dynamics will continue to characterise the zinc market in 2012, as trading houses and investment banks look to profit from the carry trade, while end users will at least find solace in lower zinc prices,” VM Group said predicting a short-term LME three-month zinc price of $US2,100per tonne to $US2,250 per tonne.
BNP Parabis said it expects zinc will continue to underperform into 2012 and that it is unable to be persuaded towards the bullish sentiment for zinc, especially relative to other metals.
“Zinc may be relatively cheap, but perhaps it still deserves to be,” BNP PArabis said.
“Although the longer-term bullish case remains intact, zinc has much work to do first.
“We expect zinc to continue to underperform for several months yet. And it might well be more vulnerable than most base metals, including even nickel, were economic/financial conditions to deteriorate further than expected.”