Zinc prices set to tumble
London, August 2, 2007
Zinc prices are set to tumble further once it becomes clear towards the end of the year that the metal is heading for years of excess supply, analysts said.
Futures prices for the metal, used in cars and construction, peaked at $4,580 late last year and were trading at $3,530/40 a tonne, down 16 per cent from the end of 2006.
"It's a supply-side story. No matter what you forecast for demand, it will still come out a broken market," said Graham Deller of UK-based metals consultancy CRU International.
He said rising mine production would lead to years of substantial surpluses, taking prices to around $1,300 a tonne by mid-2009, or one-third of current levels.
Before zinc prices rallied towards the end of 2005, they had spent years languishing around and below $1,000 a tonne.
In June, the twice-yearly Reuters base metals price poll put the median average for the LME cash price at $3,531 in 2007 and at $2,986 in 2008.
But some analysts said market players were monitoring low stocks and saw scope for a brief spike upwards first.
William Adams of Basemetals.com was also bearish, but warned of a possible upside surprise after the slower northern hemisphere summer demand period ends in September.
"We could see a spike back into the $4,000s, driven by tight supply and short covering near term," he said. "The market is over-complacent, stocks are low and continuing to fall and the global economy is much stronger than people had pencilled in."
Adams said prices might reach a record, but that this would depend on support from strong copper prices.
Total reported stocks of zinc are below critical levels at 3.6 weeks' worth of demand. Comfortable levels are considered to be around six weeks' worth.
Analysts said tight mine supply was easing, with many Western miners extracting more than expected.
"Once we get towards the end of this year, or the beginning of next year it will be clear that a signficant increase in mine supply is coming," said Huw Roberts of consultants CHR Metals.
World zinc mine output would jump by almost one million tonnes next year from a predicted 11.2 million this year, CRU's Deller said.
CHR Mertals' Roberts said there had been successful mine restarts and commissionings of smaller or mid-sized operations, which would start raising smelter output. But he thought it might take something bigger to spark a price reaction.
"Until now the bulls have wanted to stick with the idea that projects are going to be delayed," Roberts said."Once we start seeing regular shipments from San Cristobal in Bolivia, that could be the catalyst," he added.
Apex Silver's 65 per cent-owned San Cristobal -- one of the big mine projects -- is due onstream this quarter, with full production of 180,000 tonnes per year (tpy) of contained zinc anticipated in the final quarter.
Deller said higher than expected Chinese zinc mine output would also be a key factor tipping zinc into over-supply as the nation's expanding smelter capacity turned this material into metal, mainly for export to the West.
Chinese output of contained zinc in the second quarter was 200,000 tonnes higher than year-ago levels.
Deller said the zinc market had spent the year to date in balance or a small deficit, but saw a 75,000 tonnes surplus for the full year.
In 2008 he predicted a 340,000 tonne build-up in stocks, despite a near five percent rise in demand. Stocks would jump by around 1.0 million tonnes between 2008 and 2010, he added.Reuters