The accepted wisdom for zinc this year has been that zinc remains at the marginal cost of production and significant falls in price would trigger capacity closures, a situation that will support the zinc price this year and next.
Source: John Gross/The Copper Journal
On the upside, high inventory (seen above) and a continuing surplus will cap any zinc price movements to the upside. As a result, zinc was widely expected to be range-bound in 2012 with no significant upside before late 2013 at best.
However, Scotiabank economist Patricia Mohr predicted in a Mineweb article that zinc will become the “big base metal play,” as a strong rebound in US auto assemblies supports base metal premiums in the U.S.
Mohr predicts the upcoming closure of the Brunswick mine in Canada, Century in Australia, and Vedanta’s Lisheen mine in Ireland will shift sentiment towards zinc, with prices rallying in anticipation of tightening supplies. Rising automotive demand really needs an uptick, as does construction, to complete the picture for zinc.
The automotive and construction sectors are two of the main drivers of galvanized steel consumption. White goods in the US and in China will be looking for a boost from construction and house moves before consumption really picks up.
Zinc Price Forecast?
Our position is that Mohr’s predictions are a little premature. Certainly anticipation precedes real demand, and as such, investors will start to apply upward pressure to prices before real demand manifests itself; but even so, construction is unlikely to come back strongly before the middle of the decade.
By that time, mine closures on the supply side and rising consumption will begin to create a squeeze on those inventory levels. For this year though, we believe zinc will remain range-bound and buyers should not be in fear of rapidly escalating prices.