Zinc Sets a Record as Supply Drops, and Heads for Higher Prices
2006-01-29 19:32 (New York)
By Simon Casey
Jan. 30 (Bloomberg) -- Zinc prices have risen so fast that
Robin Bhar, a metals analyst for 22 years, is about to raise his
forecast for the second time in two months.
``We've all been left behind,'' said Bhar, 46, who follows
the market in London for UBS AG, Europe's biggest bank by assets.
``It's just phenomenal. No-one in their wildest imagination
thought it would get to these levels.''
Zinc has almost doubled since July 15 to $2,250 a metric ton
on the London Metal Exchange, where it traded at record levels
for 11 straight days this month. Little relief is in sight, as
mining companies restrain investment in expanding production and
China stops exports and begins imports of the metal.
``There is a global shortage,'' Greig Gailey, chief
executive officer of Melbourne-based Zinifex Ltd., the world's
second-largest zinc supplier, said last week in an interview.
``New mine development is a lengthy process and it's difficult to
see new mines coming on stream in the short to medium term.'' His
company has no new mines planned until 2008 at the earliest.
Driving the market is China, whose economy grew 9.9 percent
in 2005, stoking demand for zinc, used as a rust-resistant
coating for steel in buildings, cars and appliances. Rising
prices have increased profit for companies such as Xstrata Plc of
Switzerland and Vancouver-based Teck Cominco Ltd., the world's
biggest zinc miner.
The jump has boosted raw material costs for steelmakers
including Mittal Steel Co. and Arcelor SA. Mittal last week made
a hostile $22.7 billion bid for Arcelor, seeking to cut $1
billion of annual costs.
`Shift in Buyers'
Pension funds and speculators are joining the rally in zinc
and metals including copper, aluminum and gold, seeking an
alternative to stocks and bonds. The Reuters Jefferies CRB Index,
which tracks commodity futures, gained 17 percent last year,
compared with a 3 percent increase in the Standard & Poor's 500
Index of U.S. companies.
Money held by funds tracking commodity-linked indexes will
rise 38 percent this year to $110 billion in 2005, according to
Barclays Capital. Hermes Pensions Management Ltd., which oversees
the U.K.'s largest pension fund, said Jan. 18 it will invest 1
billion pounds ($1.8 billion) of London-based BT Group Plc's
retirement plan in commodities including metals.
``Two, three, four, five years ago, we would have seen that
with the hedge funds, but not the big state pension funds,'' said
Bob Diamond, chief executive officer of Barclays Capital, in an
interview last week. ``We are seeing an asset class shift.''
Legacy
The shortage of zinc is a legacy of lower prices in the past
and a lack of investment by the industry. Prices dropped to a
record low of $742 a metric ton in August 2002, prompting mine
closures and leaving producers such as France's Metaleurop SA
bankrupt. London-based Anglo American and Xstrata are now
struggling to meet the world's zinc needs.
Labor disputes this month at Mexico's Industrias Penoles SA
and mines run by Peru's Volcan Cia. Minera SA have added to
concern that zinc production will lag behind demand this year.
Inventories will drop this year as demand outpaces supply
from the world's mines. Nick Hatch, an analyst at Investec
Securities in London, estimates zinc use will exceed global
production this year by 310,000 metric tons.
The stockpiles monitored by the LME have declined by 40
percent in the past month to 375,750 tons.
``There is a dearth of new projects as a consequence of a
lack of exploration,'' said Alan Heap, Citibank Inc.'s Sydney-
based director of commodity analysis. ``Deficits are set to
persist.''
Heap, who said in 2005 that metal markets were entering a
``super cycle'' jump in prices, last week raised Citibank's
first-half average zinc price forecast 44 percent to 97.5 cents a
pound, or $2,150 a ton. Morgan Stanley this month raised its 2006
zinc forecast 12 percent to 95 cents a pound, or $2,094 a ton.
`Price Peak'
Zinc is already up 17 percent this year. The price was
forecast to rise 21 percent for the whole of 2006, averaging
$1,666 a ton, according to the median estimate of 24 analysts
surveyed by Bloomberg in December and January. Zinc will rise
further than any other metal on the LME, according to the survey.
``We expect the deficit to persist into 2007, implying a
price peak may be over a year away,'' said Simon Toyne, an
analyst in London at Dresdner Kleinwort Wasserstein.
China became a net importer of zinc in 2004 as its economy
boomed, according to Canada's Teck Cominco. The nation's zinc
demand jumped 16 percent to 2.7 million tons in the first 11
months of 2005. Consumption in the West demand by 4.6 percent as
steel production slowed, according to data from the Lisbon-based
International Lead and Zinc Study Group.
--With reporting by Francine Lacqua in Davos, Switzerland.
Editor: Carrigan (tjc). |
