Stephen:
The report contains a very common error - confusing demand with consumption. Let me define demand as "reported consumption plus/minus change in the sum total of inventory held by users, merchants, producers and exchanges."
The change in demand for a commodity arising solely from change in total inventory can, and documentably often does, exceed short-run change in actual consumption. Therefore, to ignore inventory behavior is to lay the forecaster open to serious error in forecasting supply/demand balance, inventory/consumption ratio, capacity utilization, and resultant price behavior.
As usual, the Asian recession induced significant inventory dumping in many metals, causing the marked retrenchment in pricing of 1998. The flip side of this is that users', merchants' and producers' overall zinc (and other metals) inventory is now quite low as measured in days worth of consumption. So low, in fact, that they appear to have been using LME inventory to supply marginal needs for the metal. A recovery in consumption, without commensurate addition to inventory, would further reduce the inventory/consumption ratio (IC). Hence, on the basis that the IC is now at a very low level, inventory would have to be increased, if just to keep pace with rebounding consumption. Presuming users, merchants and producers keep just 30 days of consumption in inventory, a 2% consumption rebound requires addition of about 16,000 tonnes to inventory. Increasing the I/C ratio (as usually happens during economic recovery)to 32 days requires adding another 43,835 tonnes to inventory.
It is probable, therefore, that additional demand for approximately 60,000 tonnes of zinc will arise from inventory restocking. Imagine what additional demand could arise if users sense a shortage developing and decide to stock up big time to hedge against shortage? Historically, such actions can become very self-fulfilling.
RH |
