By Leia Michele Toovey- Exclusive to Zinc Investing News

The zinc industry has been quick to respond to the slump in prices and a host of producers have announced cutbacks and closures. However, without a definitive shift in the current global economic current; supply cuts have yet to directly improve pricing.  

In Shanghai, spot zinc traded at about 9,350 Yuan a tonne on Thursday versus 13,850 Yuan 3 months earlier. Lead prices are down more than 60 per cent this year at around US$995 a tonne. From a historical perspective, these prices are pretty good; it was only in 2005 that lead prices moved above $1,000 mark. However, moving forward, low stocks and strong demand from battery makers could help lead power ahead and become the best placed industrial metal to weather the global economic downturn.

Lead has joined the likes of platinum and palladium in being hit by poor automotive sales data. However, analysts say that lead has been unfairly grouped with these metals. Only around 10 per cent of lead demand is directly linked to new vehicle production, through new batteries, and about 40 per cent of lead is used in car replacement batteries. The remainder of lead consumption is mixed, but includes 25 per cent from industrial batteries. As economies worsen, motorists are hanging onto their cars for longer increasing the demand for recycled batteries. A report from the International Lead Zinc Study Group (ILZSG) said lead demand, helped by growth in China, rose 5.8 per cent to 6.427 million tonnes in the first three quarters of 2008 from 6.074 million in the same period a year earlier. The ILZSG also said net exports of refined lead from China were significantly lower at 8,000 tonnes compared with 164,000 tonnes during January to September 2007. London Metal Exchange lead stocks have fallen around 60 per cent since June highs of over 100,000 tonnes to about 44,000 tonnes. Low metal prices have also resulted in output cuts of sister-metal zinc, another potential upside for lead as both metals are usually mined together.

Chinese zinc smelters have slashed sales of metal as the current zinc prices have fallen below production costs. Now smelter officials expect prices to rise as the central government, keen to boost domestic consumption, is likely to start buying refined zinc to build up reserve stockpiles. Beijing is expected to buy 100,000-300,000 tonnes of refined zinc at prices of 11,000-12,000 Yuan per tonne for its reserves. The central government is considering buying all types of base metals, including zinc, as reserves to help boost domestic demand and save jobs. The government plans to buy metal from local smelters; due to the fact that most of the local smelters have already taken measures to curb production, this government move could bolster prices.

Goldman Sachs sharply cut its three-month and six-month forecasts for base metals, while it has raised its forecasts for precious metals.  Tight credit markets have destroyed short-term demand and created surpluses in base metals markets; while the precious metals, particularly gold provide a welcome safe haven for investors. While miners and metal producers have made substantial production cuts, large surpluses and high inventories will weigh on prices in the short- to medium- term, the bank said. Prices may begin to bounce off their bottoms by the end of 2009, but in the firm’s opinion, a broad recovery isn’t likely until 2010. Goldman said zinc had the strongest fundamentals, and therefore has less risk of steep price declines. For zinc, the bank lowered its three-month forecast by 18 per cent to $1,080 per tonne and its six-month forecast by 19 per cent to $1,140 per tonne. Goldman Sachs sees demand for gold as a haven from the financial crisis as steady in the New Year.

Company news

Acadian Mining Corporation announced today that it was scaling back its operations at its Scotia zinc-lead mine  in the face of continued deterioration of metal prices. Operations staff has been further reduced by 38 bringing the total mine staff down to 70. A revised mine plan is being implemented which will focus on mining currently developed run of mine grade ore and lower grade (approximately 2% zinc) material at surface with a zero strip ratio. Waste stripping will be deferred until economic conditions have sufficiently improved. These additional operational measures were necessary due to the rapid decline in metal prices over the past two months.

Xstrata Plc has cut ore production by 20 per cent at its McArthur River lead-zinc mine in northern Australia, it said on Tuesday. “We have reduced mine production from 2.5 million tonnes per year to 2.0 million tonnes,” an Xstrata spokeswoman said. On an annual basis, the move would result in the loss of 68,000 tonnes of concentrate, containing 31,700 tonnes of zinc metal and 7,200 tonnes of lead. How long the production cut will last depends on market conditions.

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