The short term future looks rather bleak for zinc. Demand for galvanized steel, the main market for zinc, has probably dropped by the same proportion as the general steel market. Most galvanized steel is used in the construction and automotive markets forcing US producers to aggressively cut production as demand has ground to a halt. European steel producers have not been as dynamic in responding to the falling demand fearing imports may flood into the market and force them to lose market share with the exception of Corus which has just announced it will be mothballing its Llanwern strip mill which is capable of 360,000 tons/annum. Though this plant was obviously not running at capacity prior to closure. Asian producers initially cut production as prices slid, have now tentatively begun to come back to the market as galvanized prices have stabilized over the last month. There is belief in China at least that the infrastructure projects there will result in increased demand within a matter of months (spending started some 2 months ago while the stimulus debate just started in the US) but it remains to be seen to what extent that faith is based in reality. The auto and housing industries are still as severely depressed in China as in Europe and the US Goldman Sachs seems to think zinc will benefit from the infrastructure stimulus package. We are not sure which infrastructure programs Goldman have been looking at but as we examined in this previous blog about 30% of the US package is for physical infrastructure so the increased demand for metals in the USA will not be as much as many assume.
On the supply side, the major mining companies have been closing capacity since the summer. With the fall of house prices in the US over the last 18 months there were fears over zinc consumption even in late 2007 but no attempt was made to limit production before the second half of last year. Since then, some 1.1mn tons of cuts have been made to refined production according to Standard Bank and some 1.5mn tons of concentrate production. But miners are still lagging the market. Just this week, Boliden decided to keep its 200,000 tons of zinc equivalent Tara mine open following an agreement with unions over reduced wages. This capacity could really have done with being taken out the market if miners were serious about supporting the price. The International Lead Zinc Study Group (ILZSG) reported that closures have been sufficient to leave the market in only a 134,000 ton surplus up to November but Standard Bank estimates the market at more like 280,000 tons in surplus creating a rising stock inventory at producers and futures exchanges. The reality is even at these prices there is more zinc being produced than the world is using and consumers can expect prices to remain depressed until well into the second half of 2009, possibly into 2010. Our prediction is for prices to trade in a $1050-1250/ton range for the first half of this year with prices only beginning to firm in the third quarter if demand picks up in Asia and North America.
–Stuart Burns & Lisa Reisman