Zinc seen reaching $1,000/T; lead to prosper
Thu October 9, 2003 05:12 AM ET
By Lorna Hutchinson
LONDON, Oct 9 (Reuters) - Laggard price performer zinc should play catch up in coming months, reaching $1,000 a tonne after faltering in the recovery stakes, while lead's strong fundamentals should fuel further, but more limited, price gains, analysts say.
"This cycle is the most torpid recovery for base metals ever -- prices bottomed in November 2001 so it's lasted very nearly two years," Stephen Briggs, base metals analyst at Socgen, said.
"With the exception of nickel it's been a very drawn out, un-dramatic bull market, but on the upside it's a steady and more sustainable cycle," Briggs said, adding that for zinc the bottoming process on the London Metal Exchange (LME) had been particularly long.
Zinc, the world's third most used non-ferrous metal after copper and aluminium, is primarily used as a galvanised coating on iron and steel to protect against corrosion, on cars, roofing and cladding on buildings.
"Zinc's still got a lot of catching up to do, while lead has already recovered a lot more. By the end of next year zinc at $1,000 a tonne is a possibility," Briggs said.
Ingrid Sternby, base metals analyst at Barclays Capital, agreed: "Zinc is one of the metals with the best upside potential...Lead has already performed pretty well."
LME benchmark three-months zinc prices MZN3 have rallied briskly over recent months, fuelled largely by investment fund buying, and early on Oct 9 prices reached a peak of $896.50 a tonne -- their highest in 2-1/4 years.
But even zinc's recent peak is only some 21 percent higher than the life-of-contract low of $742 hit on Aug 13, 2002 -- the metal's lowest level since the late 1980s.
Meanwhile lead prices MPB3 have made more substantial gains in percentage terms, surging some 38 percent since September 2002 to its current peak at $568 a tonne, also scored on Oct 9.
Lead's biggest end-use market is replacement automotive batteries.
"Our base case for lead is a target of $600/650 in the next six months. Lead's fundamentals are much better than zinc's, but it (lead) has already improved a lot, so it will peak before zinc as it is further down the (recovery) cycle," Socgen's Briggs said.
Kamal Naqvi, base metals analyst at Australian investment bank Macquarie, said he was more friendly towards zinc in terms of potential price gains and agreed that $1,000 a tonne could be achieved by the end of 2004.
"Structurally, demand for lead has weakened and battery demand in the West is only modestly better. Demand for zinc is not fantastic either, but there is much stronger growth in galvanised sheet capacity in China," Naqvi said.
Naqvi added that hedge funds were more likely to focus their attention on zinc, given the still relatively low level of prices.
LEAD MOVING INTO DEFICIT; ZINC STILL IN SURPLUS
From a fundamental perspective, lead is faring substantially better than zinc, but zinc's fortunes in this area should improve next year, analysts said.
"Because they are often produced together, the fundamentals of lead and zinc are more closely tied. Even so, there are clear differences between them. Whereas zinc has remained in surplus this year, lead has started to move into deficit, a contrast broadly reflected in LME stock changes," Socgen's Briggs said.
LME warehouse stocks of lead have been in steady decline since early April and currently stand at 153,100 tonnes, down over 29,000 tonnes over the past six months and sharply down from the all-time peak of 371,800 tonnes in September 1994.
Meanwhile, LME zinc stocks have been steadily rising over the past 2-1/2 years, from 191,100 tonnes in early February 2001, to a current peak of 695,600 tonnes.
Zinc stocks reached an all-time peak of 1.23 million tonnes in August 1994.
"The underlying fundamentals of zinc are still poor and the market will only move into deficit if producer discipline is maintained...But zinc's fundamentals will get better next year," Socgen's Briggs said.
This year the lead and zinc industries have benefited from a raft of smelter cutbacks and closures, mainly concentrated in Europe, on a combination of low metal prices, premia and treatment charges.
The closures -- some of which have already taken place and others due later this year -- have included Metaleurop PNRY.PA 's Noyelles-Godault lead and zinc plant in France; MIM Holdings MIM.AX Ltd's Avonmouth lead and zinc smelter in England and Glencore's Portovesme lead and zinc complex in Sardinia.
Analysts said the subsequent shortfall this year would amount to some 450,000 tonnes of lead and 500,000 tonnes of zinc.
Barclays BARC.L ' Sternby said that with the removal of such an amount of refined zinc capacity from the market, a reversal of the metal's rising inventory trend was likely to take place next year as the market moved into deficit. |
