For most of 2006, China was a net importer of refined zinc, but there was a huge surge in exports at the end of the year as smelters rushed to try to beat an end to export tax rebates. Still, even with China ending up a net refined zinc exporter by 7,000 tonnes, LME zinc inventories dropped 300,000 tonnes in 2006.
China was still a big net importer of zinc concentrate in 2006. Remember, smelters have to get their concentrate from miners, so these refined zinc production numbers from smelters don't mean much for long-term zinc supply. It's the mine production numbers that matter most. Smelters can't increase production without getting increased supply from mines. It was much easier for China to increase their smelter output by building smelters and importing zinc concentrate than it was for them to develop new mines, which can take 10+ years.
Because of the shortage of zinc concentrate and overinvestment in smelters, Chinese authorities already are taking measures to cap refined zinc smelting capacity (http://www.bloomberg.com/apps/news?pid=20601012&sid=ahQ.nuUr6rwk&refer=commodities ). They "want producers to secure raw materials overseas to meet demand" before building new smelting capacity.
Slide 18 from this Teck Cominco presentation suggests that Chinese mine production actually may have already peaked, as it was down 11% year-over-year in October: teckcominco.com . I don’t think you can project trends in mine production by extrapolating, as it’s more based on increases from new projects coming to production and expansions beyond mine closures and reductions, but there isn’t a big pipeline of known zinc projects in China. The future zinc mine production in China is a big unknown, though, and I think a big surprise increase in Chinese mine production is the only thing that could fill the supply/demand gap, other than much higher prices curtailing demand.
Everybody who’s done a detailed analysis of the zinc market is predicting a huge amount of new supply from China but still can’t fill the supply/demand gap. If Chinese zinc mine production doesn’t increase significantly as all the analysts project, the zinc crisis will be much worse than anyone expects. I think the actual deficit can’t continue to be so big, because inventory can’t run out completely, so the price of zinc will have to go up to curtail demand enough to prevent complete depletion of inventories.
Standard Bank said in a recent report, “we have had to rein in our expectations for consumption and ramp up our production forecasts, otherwise there would simply be no zinc left by the end of 2008! Therefore we are having to assume that the process of demand destruction by way of rationing, down-gauging and substitution will increasingly be in evidence by the end of our forecast period, while China must live up to its reputation and fill the gap from a supply perspective."
RBC said recently that demand will be constrained by supply in 2010: "Our analysis suggests that there will be insufficient supply to meet our forecast underlying demand for zinc in 2007. As a result, we forecast WW consumption growth will be limited to 1.3%. In 2008 and 2009, increasing production should allow WW consumption growth to rebound, though we believe demand will again be constrained by supply in 2010."
CIBC expects a supply deficit of over 700,000 tonnes between now and 2010, as illustrated in this chart of projected supply and demand: Message 23190905 . I don’t think that’s possible because inventories are currently far below that amount.
All these firms may be wrong, but anyone who does a detailed analysis of the zinc market like they've done has come to a conclusion that zinc demand will exceed available supply in coming years without big price increases. |
