GFMS Analysis Illustrates Bullish Case for Zinc
By Jon A. Nones
15 Jul 2006 at 10:14 AM EDT
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- Zinc has reclaimed much of the glory it attained in mid-May, hitting highs today of $3,520/tonne on LME. According to the July 2006 issue of the GFMS Quarterly Newsletter, prices will remain at high levels of +$3,000/tonne over the coming months on tight supply and robust demand – with special attention to China.
“Zinc prices have been on a phenomenal run over the last year, caught up in the fund supported ‘super cycle’ which has swept base metal prices into the stratosphere,” wrote Peter Roberts, metals analyst for GFMS Metals Consulting.
Zinc reached an all-time high of $3,950/tonne on May 30th, before dropping 25% in June to a low of $2,940/tonne. Now trading back in the mid-$3,000s, Roberts attributes support to increasingly tight supply, insufficient mine output and strong underlying demand.
LME stocks have plummeted 46% year-to-date to a current level of around 212,500 tonnes. The latest data by the International Lead and Zinc Study Group (ILZSG) shows the market in a deficit of 92,000 tonnes in the Jan-April period, with global demand rising around 3% to 3.594 million tonnes. The annual world consumption of zinc is 10.7 million tonnes.
In June, Jason Hommel, Editor of Silver Stock Report, alerted investors to “a world-wide zinc shortage,” urging them to “act quickly, before other investors, to benefit the most from the looming zinc shortage.”
The LME at the time had only 8.2 days of zinc inventory, and would be out of zinc by November, 2006, according to Hommel. At current draw down rates (240,000 tonnes in the past 6 months) LME stocks will be exhausted by November, 2006, he noted.
“As long as zinc inventories continue to decline, and as long as we know that it takes at least two years to bring major new zinc mines to production, I think it's safe to say that investing in zinc is a good idea,” said Hommel.
Demand
According to Roberts, the main driver for consumption has been the continued expansion in Chinese demand, which reported growth of 12.4% year-on-year.
The rise in galvanized production in China has been a key factor in this growth, wrote Roberts. A number of galvanized capacity increases are in the pipeline, which will add further support over the second half of the year, he added.
Bayannur Zijin Nonferrous Metals Co. has recently commenced production at its 100,000 tonne-per-year (tpy) electrolytic zinc project, and Huludao Nonferrous Metals Group has reportedly restarted 50,000 tonnes of idled capacity at its 130,000 tpy Zhuzhou smelter, according to GFMS.
In addition to Asia, demand within Europe and the U.S., which has seen 8.5% growth year-to-date, will continue to support prices, according to Roberts.
Supply
ILZSG data shows global refined production growth up 3% year-on-year, to 3.502 million tonnes from January to April. However, GFMS research shows refined production growth continues to be ‘undermined’ by insufficient advances in mine output.
The data shows mine output up 5.6% year-on-year to 3.381 million tonnes, with Chinese growth as one of the primary drivers, up 20% so far this year, according to the National Bureau of Statistics. China also maintains its status as the largest refined producer, leading global production growth, up 15.1% this year.
GFMS expects this growth rate to be maintained over the remainder of the year, aided by further capacity increases.
Outlook
According to Roberts, zinc continues to possess positive fundamentals going forward, which will add support through the coming months.
“The supply side remains tight and demand remains robust,” he wrote. “GFMS Metals Consulting believes prices will remain at high levels (+$3,000/tonne) over the coming months.” |
