Zinc rally may have further to run as supply shortfall bites
MELBOURNE: London zinc prices have nearly doubled over the past 13 months and are closing in on nine-year highs, but signs of tightening in the global market for refined zinc means the rally may have further to run.
Zinc bulls pushed prices higher after the closure of several giant zinc mines last year led to a steep drop in global ore supply, setting the stage for a shortage of the metal used to rust-proof steel.
There are now signs that shortage is materialising, with global stocks shrinking and prices for spot metal rising, just as post-holiday demand picks up in China and a strike at North America's second-largest zinc plant further cuts supply.
"Any kind of financial investor who invests in base metals is long zinc, that's in New York, London, and Shanghai," said Ivan Szpakowski, Chief Investment Officer of Academia Capital, a US-based emerging markets and commodities-focused hedge fund.
"It's by no means maxed out, there's more money that can be pushed in, and more money from multi-asset type investors."
Higher zinc prices will provide an additional boost for diversified miners such as Teck Resources and Glencore, which are also being supported by an expected rally in copper.
Lower mine supply has pushed down treatment charges - the fees that smelters charge to process ore into zinc - to historic lows of around $30 a tonne. Smelters have been staying alive only because they have been able to cash in on rising prices of metal, traders said.
"Everyone is scratching around for mine supply. The winners are the guys who mine the stuff, the big diversifieds. The losers are the zinc smelters who are fighting for concentrates," said analyst Daniel Morgan of UBS in Sydney.
Korea Zinc Inc said this month it plans to cut its refined zinc production by 7.7 per cent to just under 600,0000 tonnes this year due to low mine supply and reduced treatment charges.
A strike at Noranda Income Fund's zinc processing plant in Quebec stretched into a 13th day on Friday, with no talks scheduled between management and the union, which will also cut metal supply.
Global zinc stocks across the London Metal Exchange (LME), China and the United States are now at their smallest since 2009 on a seasonal basis.
Available LME zinc stocks tipped below 200,000 tonnes last week for the first time since 2008, having halved over the past four months, equivalent to less than one week of annual production.
Most of the outflows have come from both LME and private storage in New Orleans, with metal flowing mainly to Asia, said a warehouse source and two traders, largely depleting private stocks.
Remaining zinc has become very difficult to source, traders in Asia said, with one player holding more than half of the LME material available, according to LME data.
Meanwhile the time spread for buying spot metal on the LME has narrowed to just $4 contango, from more than $20 in January, in a sign of increased demand for spot metal.
Zinc bulls pushed prices higher after the closure of several giant zinc mines last year led to a steep drop in global ore supply, setting the stage for a shortage of the metal used to rust-proof steel.
There are now signs that shortage is materialising, with global stocks shrinking and prices for spot metal rising, just as post-holiday demand picks up in China and a strike at North America's second-largest zinc plant further cuts supply.
"Any kind of financial investor who invests in base metals is long zinc, that's in New York, London, and Shanghai," said Ivan Szpakowski, Chief Investment Officer of Academia Capital, a US-based emerging markets and commodities-focused hedge fund.
"It's by no means maxed out, there's more money that can be pushed in, and more money from multi-asset type investors."
Higher zinc prices will provide an additional boost for diversified miners such as Teck Resources and Glencore, which are also being supported by an expected rally in copper.
Lower mine supply has pushed down treatment charges - the fees that smelters charge to process ore into zinc - to historic lows of around $30 a tonne. Smelters have been staying alive only because they have been able to cash in on rising prices of metal, traders said.
"Everyone is scratching around for mine supply. The winners are the guys who mine the stuff, the big diversifieds. The losers are the zinc smelters who are fighting for concentrates," said analyst Daniel Morgan of UBS in Sydney.
Korea Zinc Inc said this month it plans to cut its refined zinc production by 7.7 per cent to just under 600,0000 tonnes this year due to low mine supply and reduced treatment charges.
A strike at Noranda Income Fund's zinc processing plant in Quebec stretched into a 13th day on Friday, with no talks scheduled between management and the union, which will also cut metal supply.
Global zinc stocks across the London Metal Exchange (LME), China and the United States are now at their smallest since 2009 on a seasonal basis.
Available LME zinc stocks tipped below 200,000 tonnes last week for the first time since 2008, having halved over the past four months, equivalent to less than one week of annual production.
Most of the outflows have come from both LME and private storage in New Orleans, with metal flowing mainly to Asia, said a warehouse source and two traders, largely depleting private stocks.
Remaining zinc has become very difficult to source, traders in Asia said, with one player holding more than half of the LME material available, according to LME data.
Meanwhile the time spread for buying spot metal on the LME has narrowed to just $4 contango, from more than $20 in January, in a sign of increased demand for spot metal.
