Zinc’s Rally May Be Just Getting Started

Posted Posted by Minfocus in PGE Supply-Demand News
Jun
25

With the metal’s price up more than 25% this year, some analysts say recent gains could pale in comparison to an anticipated future rally.

By Rhiannon Hoyle

June 25, 2016

Bloomberg Commodity Index

A global shortage of zinc is galvanizing investors. Its price is up more than 25% in 2016, after hitting a 6½-year low in January, making it one of this year’s best-performing metals.

Zinc closed Friday in London at $2,018 a metric ton, up 25% since the start of the year. That compares with a 7% advance for aluminum and essentially no gain for copper. While zinc’s run-up has stalled this month, some analysts think recent gains could pale in comparison with an anticipated future rally.

More than half of zinc production goes into coatings to protect steel from corrosion, but the base metal is also used in everything from fluorescent lights to sunscreen. Several large zinc mines have closed as reserves ran dry, while others, including some run by major supplierGlencore (ticker: GLEN.UK), cut output when prices were falling.

 

RBC Capital Markets now calls zinc its favorite commodity. ICBC Standard Bank analyst Leon Westgate said in a June 10 note that prices “may be on track to set new record nominal highs” of more than $4,500 a metric ton within the next 18 to 24 months. The market recorded an all-time high around that level in 2006, as China’s breakneck growth fueled demand for industrial metals.

Investors have been anticipating a supply shortfall for some time as operations includingMMG’s (1208.Hong Kong) huge Century mine in Australia were slated to be shut. “Some of the industry’s big mines have closed over the past several years, and that is going to start filtering through to the market,” Société Générale analyst Robin Bhar tells Barron’s. RBC estimates that global output fell last year for the first time since 2009 and projects that it will slip again in 2016. Reported stockpiles across the U.S., Europe, and Asia are shrinking.

NOT ALL OBSERVERS are confident that prices are headed toward all-time highs. Citigroup analyst David Wilson says inventories previously held in exchange-approved warehouses—which are down to roughly 640,000 tons from more than 1.5 million three years ago—may have been moved to stockpiles elsewhere, rather than having been used by industry. Consequently, he argues, the market may be getting a bit ahead of itself.

Société Générale’s Bhar also ponders whether Chinese demand may disappoint investors, as China’s economy slows and some industrial users, such as auto makers, swap steel for lighter materials.

FOR NOW, HOWEVER, China’s steel output has perked up after a lull earlier this year. The World Steel Association said China’s production hit 70.5 million tons in May, 1.8% above the total in that month last year and up from roughly 60 million tons in both January and February. China’s imports of refined zinc climbed about 45% in the first five months of the year.

Even with its reservations, Citi is more bullish on zinc than on other base metals, including copper, lead, and aluminum. The large mine shutdowns and output cuts—particularly Glencore’s decision, which reduced its zinc output by a third—are clearly boosting sentiment, Wilson observes. He adds, “Zinc’s supply-side crunch does provide a compelling story.”

RHIANNON HOYLE reports on commodities for The Wall Street Journal from Sydney.

E-mail: editors@barrons.com

Source: http://www.barrons.com/articles/zincs-rally-may-be-just-getting-started-1466828646