By James Wellstead – Exclusive to Zinc Investing News
2011 has been a rather disappointing year for industrial metals and the zinc market has been no exception. As the year winds down, declining economic growth in the Eurozone and China coupled with increasing zinc mine and production supply have taken their toll on zinc prices. While 2012 holds some prospect of regaining zinc price support, highlights will likely include continued exploration and development in the junior mining sector.
Through much of 2011 high zinc stockpiles in LME and Chinese warehouses have dominated headlines. The International Lead and Zinc Study Group (ILZSG) recently reported that refined zinc stock surpluses increased by 308,000 tonnes between January and October 2011, compared to 270,000 tonnes over the same period last year.
However, despite the economic uncertainty of the year, the surpluses were not driven by falling demand. Global refined zinc usage for 2011 increased by 2.2 percent, or 12.85 million tonnes, the ILZSG said earlier this month. Despite Eurozone financial markets being continuously pummelled with the political fallout of the region’s debt crisis, European zinc demand actually increased by 2.9 percent, leading global refined zinc metal usage percentage growth in 2011. As the world’s largest zinc consumer, China also bolstered demand growth as the country upped its consumption by 2.1 percent for the year.
Instead, it was rising global zinc mine production that has driven much of the surplus growth this year. Last month, the ILZSG predicted global zinc mine production will have increased by 5.6 percent for the year. These increases have been due in large part to expanded production in China, India, Kazakhstan, Mexico and Russia, which have offset the decline in production out of Peru.
Refined zinc metal output also increased thanks to rising production in China, India, South Korea and Peru, as output grew by 2.1 percent in 2011.
2011’s end of year slide
As the year comes to an end, continued pessimistic economic scenarios in the EU and China have taken their toll on zinc producers and miners. With the OECD now predicting that the Eurozone, representing more than 30 percent of global GDP, is headed for a recession, demand for galvanized steel (the primary use of refined zinc) is likely to fall.
Graham Deller of industry consultants CRU Group recently told Reuters that “[o]ur best guess is that European zinc consumption, mainly because of what is happening in the steel sector, is going to be down 4-5 percent in 2012 versus this year.”
China, too, shows signs of slowing as recent as Flash Manufacturing PMI levels (a measure of national manufacturing activity) remains at contractionary levels, though rising slightly this month from 47.7 to 49.0 (a figure below 50 signifies declining production).
As a result of zinc surpluses and now flagging demand, zinc prices have declined significantly. LME zinc prices are down 25 percent on the year, hitting US $1,861/ton Thursday morning, while Shanghai Futures Exchange zinc March futures traded down 24.5 percent on the year, having settled at CHN 14,715 yuan/ton today. Zinc has been one of the worst performing base metals of 2011.
In the short term, 2012 is unlikely to provide much relief for zinc markets, but shifting mine supply dynamics could see a positive finish for the year.
In the year to come: 2012
With declining economic growth projected for European and potentially US markets, the fate of zinc in 2012 rests heavily upon whether developing nations like China, India, Brazil and Russia can sustain demand.
China in particular will be a central component to 2012 zinc activity. Recently some of the refined zinc stockpiles have diminished as zinc producers and miners have been reluctant to sell in the current price range and winter mine production has begun to wind down. However, while Barclays Capital recently noted that recent tightening of supply witnessed in Chinese zinc markets should help cushion the downward price trend in the short term, ‘there is no reason for being fundamentally bullish on zinc in the short term’.
Other analysts have been more pessimistic on the economy as a whole, suggesting that China’s economic growth may “hit its bottom” in the first and second quarters of next year.
The mine supply story
Despite the ILZSG reporting that global zinc mine production will grow by 4.8 percent in 2012, with output coming from Burkina Faso, Canada, Saudi Arabia and Uzbekistan, mine supply is a looming challenge for zinc markets.
With continued robust economic growth expected from a number of developing countries and a slowing of output from existing zinc mine sites, current surpluses are soon to disappear.
But, this supply crunch is not yet upon us. In the meantime, 2012 could prove a year of significant junior field development.
Paul Smith, a Senior Mining Analyst at Wood Mackenzie, said in a recent podcast that because the majority of zinc mines are underground operations, their defined ore zones make them too costly or geologically challenging to expand the mine’s production.
As a result, Smith suggested that extensions of existing mines are unlikely in the years leading forward. Instead, “the main source of zinc to meet future market demand will have to be new project production.” However, due to increasingly long lead time from first discovery to production many of these projects are just beginning today, with production schedules a few years down the road.
Thus while 2012 appears likely to correction in zinc markets fundamentals, commodity and mining forecasts are always susceptible to error. Japan’s tsunami and nuclear disaster are a prime example of this uncertainty. With the country’s reconstruction likely to continue into 2012, Japan’s reconstruction could also prove important for zinc markets in the year to come.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.