The Zinc Price Story Finally Becomes More Compelling

Last month, my colleague Kyle Fitzsimmons gave us a heads up on the closure due to low zinc prices of the  Moorseboro, N.C., smelter operated by Horsehead Holdings. Moorseboro is just one of a string of smelter and mine closures in the last year that have contributed to a gradually tightening zinc market.

Free Download: The February 2016 MMI Report

Yes, yes — before you wail — we have heard that the Zinc market was supposed to be on the cusp of tightening for the last two years yet large exchange stocks in New Orleans and falling prices have shown that there has been ample supply.

Source Thomson Reuters
Source: Thomson Reuters

The tightening story started with the announcement some years back that Vedanta would be closing its Lisheen mine in Ireland and MMG would be closing the giant Century operation in Australia. While prices were high both miners extended deadlines and kept production going, but as prices collapsed the incentive dried up and both have now closed.

Production Cuts and Closures

In addition, both Glencore and Nyrstar NV announced production cuts last year in response to falling prices. According to Mitsui Mining & Smelting Co. the zinc market will have a deficit of 440,000 metric tons this year, the most in more than a decade. Goldman Sachs agrees, saying last month that the investment bank could see zinc at $1,800 per mt this year. In Goldman’s view, zinc prices had bottomed and would lead the base metals markets in a rally this year. It would appear they are right, at least in terms of zinc’s relative strength to the other metals.

According to Reuters, zinc has just flipped to a $20 premium over lead for the first time since November as lead approached a seasonal lull due to the winter season drawing to an end and zinc approaches a seasonal uplift as construction picks up in the warmer spring and summer months.

Lead demand is boosted by cold weather as it generally causes batteries to fail. 80% Of lead demand is for batteries of one form or another. Prior to this, though, zinc had been at a $145 per mt discount to lead just one week before, Reuters reports. Add in the tightening supply market and investors are closing short positions and going long on zinc. As a result, zinc prices surged to $1,790 per mt three months during late February and are still up 20% on mid-January’s six-and-a-half-year lows.

Unchained from the Dollar?

Base metals had been the plaything of a volatile US dollar, but finally after a discontented winter of price falls one or two of them are at least beginning to respond more to the underlying fundamental picture as they are to simple dollar strength.

The copper price has also shown greater strength this last week or so on a similar story of impending shortages following mine closures, but the story is not yet as compelling for zinc. Zinc smelter treatment charges have been falling, showing that concentrate is not as readily available as last year yet recent Chinese imports figures show refined zinc imports have soared 150% in January as steel mills gear up for the post-Chinese New Year production of galvanized steel products.

Free Sample Report: Our February Metal Buying Outlook

Whether Chinese demand even stays at its current levels remains to be seen. Iron ore prices are up but many have seen Q1 strength more as a short-term technical squeeze than a medium-term uplift in real demand. MetalMiner data shows domestic steel prices have edged up in China, particularly for rebar, the most basic of construction steels. For the time being, zinc’s story remains the most compelling of the base metals and Goldman’s headline price prediction may yet be achieved if zinc can move beyond its psychologically important 200-day moving average of $1,790 per mt.

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  • Goldman’s $1800 price for 2016 seems fairly pessimistic if the market sees a deficit of 480,000 this year, it’s a tenna more than it is now.

    If this eventuates, the 2015 high of c. $2,420 seems a more realistic target IMO. If and when this resistance breaks, the bull market will be in full swing and come 2017-18 we should see it test the 2008 highs of c. $4,400.

    Obviously, hidden warehouse stocks will come into play, but it will at best delay the peak until 2019-20.

    The real newsworthy synopsis is that given the severe under investment in both zinc and lead exploration since the GFC, where will the supply come from to fill the demand? How big will the deficit get and how long will it last. I am aware of a few probable contenders, but it is pretty hard to find the grades on mass, so their economic only stack up at or around the current price and they are the quality contenders. Don’t get me wrong, there are smaller known high grade where money is to be made, bit they simply aren’t big enough.

    The shorting by the Chinese in he last 6 months will result in them costing their comrades dearly in the years ahead IMO…unless they get out spending now that is.

  • Dont forget the dollar evaluation since last year. That’s why we don’t see $2400 level and $1800 is more realistic. Hidden stocks are going dow, but remember Glencore can return to full operation any time. The question is around at which the LME Zn level that will trigger that. So, the world is facing a deficit (forced) this year but it can be easily filled if the world economy doesn’t pick up (read China here). As far as projects, there are plenty of them (agree they have less Zn content), but as offer x demand adjust they will come on line. Botton line, for me, the fundamental are out there, but will take a while to see higher prices again (maybe 2017)


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