Zinc is back! After a couple of years in the wilderness, prices have rebounded back over US$1.00 a pound, and it happened faster than almost anyone imagined.
But maybe it is not as great as it looks. There are some forecasters suggesting that China has more than a million tonnes of unreported zinc stocks, and that the country now has a surplus of zinc concentrate.
Octagon Capital analyst Hendrick Visagie offers a different take — that these stockpiles do not even exist. In a note to clients, he pointed out that zinc consumption growth is related to steel consumption growth (usually slightly higher). This year, China's steel consumption is expected to grow 19%. Meanwhile, implied demand for zinc in the first eight months of the year was up 21% to 3.2 million tonnes.
"While restocking in China is included in the apparent consumption, we find it difficult to see mountains of zinc metal being stored in hidden warehouses in China," he wrote.
Mr. Visagie also dismissed concerns about rising zinc spot treatment charges, which are often a sign of an oversupplied concentrate market. He suggested that the Chinese are just modifying their spot terms to track the price escalator in the benchmark terms, and not necessarily because of any change in the availability of concentrates.
As a result, he suspects that China's demand for zinc is higher than most analysts give credit to, and there is no obvious surplus of concentrate.
"We believe that going forward, zinc prices will be stronger than most are forecasting, and in fact our average zinc price forecast for 2010 of US$1.25 per pound may be low," he wrote.
He pointed to Breakwater Resources Ltd., Farallon Mining Ltd. and Iberian Minerals Corp. as companies with strong leverage to zinc. HudBay Minerals Inc. also smelts its own concentrate and will benefit from a rise in the price, he noted.
Source: National Post
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