…Or Is the Zinc Market Really Heading Towards a Deficit?

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Continued from Part One.

Global zinc demand by region HSBC

Source: HSBC

Zinc demand is expected to be supported by two drivers: firstly a raw-material-cost-driven re-stocking cycle during the first half of 2013 – essentially a reverse of the de-stocking we saw in 2012 in China and Europe.

Secondly, Standard Bank identifies a more general increase in GDP, driving galvanized steel production, rising auto production, plus positive construction and appliance manufacturing indicators carrying through from end 2012 into 2013.

But maybe one other driver that neither bank report dwells on is financial stock building.

Although to a lesser extent than aluminum, zinc has still been a “beneficiary” (if we can call it that) of the financial stock and finance trade.

Inventory levels have risen on the LME, in off-LME locations and in China on the SHFE over the last year, as the graph from HSBC shows.

SHFE zinc price and inventory

Source: HSBC

Notice, too, how dislocated the SHFE has been from the LME. Back in the first graph, zinc prices can be seen rising strongly over recent months, but here the SHFE has remained flat, driven in part by the de-stocking cycle mentioned above.

Chinese smelter restarts in 2013 could see the metal surplus rise this year. HSBC estimates this could be in the order of 172,000 tons, but the risk to the surplus is to the downside.

If smelters do not restart to the extent anticipated, or if financial stocking accelerates, 2013 could trend towards a deficit – if that’s the case, prices will reflect it.

Zinc Price Forecast

Although HSBC is currently expecting average prices in 2013 to be around $2,129/metric ton and Standard Bank is looking at $2,045/metric ton, the upside could be $2,500/metric ton.

Most analysts are expecting the surplus to increase, however, and as such prices to remain at or around current levels through 2014 and only rising in 2015.

The banks in question – HSBC and Standard, respectively – are looking at $2,288/ton and $2,115/ton in 2014, and $2,514/ton and $2,350/ton in 2015.

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