What Glencore, Xstrata Have To Do With the Zinc Price Forecast

Continued from Part One.

Demand growth is certainly slowing, with China predicted at about 7.8 percent this year and 8.6 percent next year, marking the most significant impetus to the upside.

Europe, which is a major consumer (making up with China a joint 60 percent of global consumption) is predicted to be in recession next year and zinc demand will drop both this year and next. Two to three percent growth in North America, Latin America and the CIS is expected to make up the difference.

With the backdrop of such a depressed market in Europe, an interesting sidebar to the zinc market is playing out between European regulators and Glenstrata, as the potentially merged Glencore and Xstrata trader-miner conglomerate is popularly known.

The FT reports that the merged entity’s combined dominant position in the European zinc market is likely to be viewed as grounds for a veto by Brussels. To pre-empt such a decision, the firms are reported to be offering to sell off some assets to dilute their position.

Glenstrata would be the world’s largest miner of zinc, the metal’s top trader, and one of the biggest zinc smelting companies. With almost 20 zinc mines and projects, Glencore and Xstrata would be by far the world’s top zinc miner, producing about 11.5 percent of global supply, according to sources quoted by the FT, and would hold more than a third of European smelting capacity.

Keen as the companies are to seal the deal, selling off assets could come at a time when zinc is one of the few bright spots among the base metals. In spite of saying we will avoid a supply deficit in coming years, HSBC is predicting prices will rise from an average of US$1,997 per ton this year, to $2,205/ton next year and $2,443/ton in 2014.

Whether the market reaches the bank’s prediction of $3,004 per ton by the middle of the decade remains to be seen. It will need more than its correlation to GDP to achieve a 50 percent increase from current levels and pre-supposes the market will be in supply balance — if not actually in deficit — by that time.