The first caveat to the facts on zinc demand that we presented earlier – these are apparent consumption numbers. To a lesser extent than aluminum, zinc still has an element of the stock and finance game going on. A strong forward contango is sucking up metal and to a degree some of this falling LME inventory could be simply moving off-market into cheaper storage.
Secondly, Chinese zinc smelters have been undergoing maintenance in H2 2013, and again, an element of these rising imports reflects the fact that domestic Chinese smelters are not operating to capacity.
The main argument for higher prices centers around the degree to which new medium-size mines fail to make up the shortfall caused by the closure of older large mines – notably Glencore Xstrata’s Brunswick, Perseverance and MMG’s Century scheduled to be reaching the end of their life and due for closure in the next couple of years due to falling ore grades.
You will note the vagueness of that timescale. Century was scheduled to be closed around the middle of this decade, and that has been slightly extended to 2016 and could go out another year, or two, or more if Minmetals choose to invest more and keep the mine open. Nor is the timing of new mines such as those being built by Canadian Zinc, Donner Metals and Trevali Mining as clear as we would like.
As Zinc Investing News recently pointed out, junior miners are finding it hard to raise financing and bring projects on stream on time. For example, the article mentions MMG’s Dugald River lode, which was supposed to start in 2015 and is now almost certain to slip back.
What This Means for Metal Buyers
Although many in the industry are bullish about zinc, we don’t share their enthusiasm for rapidly rising prices in 2014. The fundamentals are looking better for zinc than most other metals in the medium term, but the story is not compelling in the short term.
Yes, the gap between new and old mine supply has the potential to cause shortages, but this is more likely in 2015-17 than the year ahead. And yes, the stock and finance trade has the potential to soak up production and raise physical premiums, in the way it has for aluminum, but if this was a major threat we would have expected to see it manifest itself more significantly before now.
Our expectation is that zinc prices are unlikely to rise beyond $2,300/ton this year and could well continue to fluctuate around $2,000-2,100/ton for the first half.