Ari:
First the answer - 157,000 tonnes LME inventory is a critical point indicating actual zinc shortage. At the 1998 average rate of LME de-stocking of roughly 3,230 tonnes/week it will take 48 weeks to reach the shortage point.
Two conditions must prevail before a base metal price takes off: 1)the industry global total inventory-to-consumption ratio must be at, or below, 4-to-4.2, and 2) smelter/refinery capacity utilization rate must be at, or above, 92%.
For zinc, smelter capacity utilization is now at, or above, 92% with Porto Vesme (Italy) not coming back on stream until late March (or later) and Cortone (Italy)operating at only 60 k tonnes, rather than at 100 k tonnes. Only 245 k tonnes of new smelter capacity will come on stream in the next 12-18 months while consumption should rise by up to 400 k tonnes in 12-24 months.
With inadequate amounts of new smelter capacity in planning, smelters will be run at a rate exceeding their long term capacity. Otherwise, inventory will very swiftly be drawn down below the "trigger point" of 4-4.2 weeks of consumption.
Smelter capacity not be run much above 92% for long owing to maintenance needs. Fire brick needs replacing, cooling water pumps need seals replaced, etc.
World total zinc inventory - producers, users, merchants and LME - now stand at about 790,000 tonnes. If consumption exceeds smelter production by about 155,000 tonnes (400 kt minus 245 kt), then world total inventory would drop to 635,000 tonnes at a time when consumption, having rebounded, will be running at about 8,300,000 tonnes yearly, or at a weekly rate of 159,614 tonnes.
The division yields an inventory/consumption ratio of 3.98 (635,000/159,614).
Therefore, during 1999 both conditions precedent to a major zinc price rise would be met, i.e. in excess of 92% smelter capacity operating rate (as now) and below 4.2 weeks inventory/consumption ratio. Most of the inventory draw-down will come out of LME stocks. In theory, LME stocks would have to drop to 176,000 tonnes to trigger the big zinc price explosion but the price advance will happen well prior to that inventory level.
This is because users will build "hedge" inventory to assure uninterrupted production of zinc-bearing products. Hence demand, as differentiated from consumption, will rise even faster than will consumption. I would guess that another 1/2 weeks worth of consumption, about 200,000 tonnes, will be demanded for hedge inventory during the next 6-9 months. Then there is the potential for additional demand as speculators try to "corner" zinc...
The 1999 potential actual consumption gain, maybe 197,500 tonnes, added to potential hedge inventory building, could amount to around 395,000 tonnes of additional demand for zinc as compared against 1998.
The zinc "community" understands that the demand turn is beginning. This is why zinc's price responded so strongly to recent news of strong U.S. economic results, news that Thai and Korean consumption of zinc was rebounding, and news that Japan's use of zinc had ceased declining.
In conclusion, zinc is primed <ggggg> for a genuine, fundamental-driven, bull market. However, gains will be accompanied by volatility driven by speculative LME trading, so I would not be surprised to see a correction take place following the past few days advances.
RH |
