Zinifex, Asia Zinc Shares to Rebound on Rising Demand
2006-06-28 22:23 (New York)
By Chia-Peck Wong
June 29 (Bloomberg) -- Investor Peter Greer says zinc's
future is bright, even though shares of Asian producers such as
Zinifex Ltd. have declined in the past two months. The stocks
are worth buying because supplies are limited and use of the
metal is rising, he says.
Zinc prices have plunged with other industrial metals from
records reached in May on investor concern that rising global
interest rates will curb economic growth. The shares fell, too,
as some investors found them too expensive. Zinc producers would
be unaffected by a slowdown because they already can't produce
enough, said Greer at Parker Asset Management Ltd. in Sydney.
``Demand from China continues to be robust and as long as
demand for steel remains high, demand for zinc will remain
high,'' said Greer, who helps manage A$200 million ($147
million), including Zinifex and Kagara Zinc Ltd. shares.
``Continued supply constraints within the zinc market will help
Zinifex trade at higher levels.''
More than half the world's zinc output is used to rust-
proof steel for the construction and auto industries.
Shares of Zinifex, the world's second-largest zinc producer,
have fallen 32 percent since peaking May 12. Korea Zinc Co., the
biggest by output, has lost 39 percent from its May 11 high.
Hindustan Zinc Ltd., India's No. 1 producer, is down 50 percent
in eight weeks and Japan's Toho Zinc Co. has fallen by 41
percent from its February high.
Commodities Slump
The 62-member Morgan Stanley Capital International
Pacific/Materials Index has declined 17 percent since peaking
May 8. The index includes Zinifex and BHP Billiton, the world's
biggest mining company.
Zinc for three-month delivery has fallen 25 percent on the
London Metal Exchange since reaching a record $4,000 a ton on
May 11. The metal, which rose 0.9 percent yesterday to $2,945 a
ton, was offered at $3,070 a ton at 10:02 a.m. Singapore time.
Because of consumption by steel and auto companies,
warehouse inventories of zinc have slumped as much as 64 percent
in the past year. Demand from China, the world's biggest steel
producer, is soaring as steelmakers build new plants.
Steel output in China -- equivalent to the combined
production from the U.S., Russia and Japan -- may increase 10
percent this year, according to estimates from the China Iron &
Steel Association. In May, the country produced 35.9 million
tons, 20 percent more than a year earlier, the International
Iron and Steel Institute said in a June 19 report.
Chinese Output
Baoshan Iron & Steel Co., the No. 1 producer in China, will
increase its capacity to 50 million tons a year from the current
30 million tons, President Xu Lejiang said April 17. Anshan Iron
& Steel Group aims to boost capacity to 30 million tons by 2010
from 18.4 million tons, Chairman Liu Jie said March 7.
Zinifex is ``well positioned to take advantage of the
growing Asian and Chinese markets,'' given that the majority of
its assets are in Australia, rating company Fitch Ratings Ltd.
said in a report e-mailed today. It rated the company BB-plus,
or the top non-investment grade, in its first rating of Zinifex.
Still, some investors say rising zinc production will lead
to a glut of the lustrous, blue-white metal. The annual growth
rate of global mine production may more than double to 9 percent
in 2007 and 2008, according to a report by Societe Generale SA.
Zinifex's shares have become too expensive after tripling
in the past year, said Peter Chilton, who helps manage $800
million at Constellation Capital Management in Sydney.
`Expensive'
``As the price went up, it became, by most criteria,
expensive,'' Chilton said. He said he sold his Zinifex shares.
He declined to elaborate. The stock sells for 19.7 times
earnings for the past year, versus a price-earnings ratio of
16.2 for the MSCI index of Asian materials stocks.
Still, Yang Ki In, an analyst at Daewoo Securities Co. in
Seoul, is sticking with his target that Korea Zinc's shares will
more than double to 130,000 won in six months.
Zinc prices should outperform the six base metals traded in
London as consumers replenish their stockpiles, Societe Generale
said in the report this month. Prices may reach $4,500 a ton,
according to the firm, which is one of 11 companies trading on
the floor of the LME, the world's biggest metals bourse.
Global consumption of refined zinc may exceed output by
350,000 tons this year, Societe Generale predicts. In the first
four months of this year, consumption exceeded production by
93,000 tons, according to data on the International Lead and
Zinc Study Group's Web site.
Sankaran Naren, who helps manage $500 million at
Prudential ICICI Asset Management Co., bought 53,537 shares of
Hindustan Zinc in May, a month in which the stock fell 32
percent.
``We bought after it fell,'' he said. ``If the commodity
trend turns positive, the shares will go up.''
--With reporting by Meeyoung Song in Seoul. Editors: Serafino
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