World demand for zinc, a key coating metal, is down 8.6% and close to a record low this year and renewed purchasing may be slow. Upshot: "Zinc prices are at a crossroads," writes commodities blogger Sandeep Daga, a financial advisor at Standard Bank in London. His meaning: Prices will either increase 15% in 2010 or fall 22% from this year's expected average.
"It's been a tumultuous year for both the global economy and the zinc market," according to a Brook Hunt analysis by Andrew Young, who says the "recession has resulted in permanent cuts to zinc demand in many countries." So, while production has plummeted, global inventories have built to a four-year high this quarter. And, despite the slight forecast recovery in zinc demand in 2010, which could result in consumption growing by 4.9%, another substantial inventory surplus is forecast. "If further output cuts do not occur," says Young, "refined market surpluses along with excessive increases in stocks could be sustained until 2013."
So, how much longer, questions Daga, can LME cash prices be supported at the latest three-month average of 85¢/lb? How much longer will fund managers pour money into zinc futures? How much longer will speculators be emboldened by the restart of some idled global galvanizing capacity in industrialized nations?
There will be considerable variation in the path of recovery ahead, according to economists. "In terms of zinc," Young says, "this means that in regions such as North America and Europe, the permanent closure of car plants will result in a permanent reduction in the demand for galvanized steel, die cast parts and other zinc-bearing products." As a result, Brooks Hunt is forecasting that this year's U.S. zinc consumption will total 900,000 metric tons, its lowest level since 1982. Western Europe's use is forecast to be 1.7 million metric tons, its lowest level since 1987, while consumption in Japan is projected to fall to 417,000 metric tons, its lowest level since 1966.
Galvanized sheet demand has passed its low point and will rise in coming months but the recovery will be weak, says economist Paul Robinson at Global Insight in Washington. "Inventory is at low levels and there is some restocking occurring; nevertheless, the improvement will be paltry compared with recovery from the earlier declines, with most consuming sectors not reaching old levels of output until 2012 or later." China is recovering faster than North America, he says, with Europe and Japan recovering slower.
Bob Garino, director of commodities for the Institute of Scrap Recycling Industries in Washington and a Purchasing.com blogger, says "investor interest, not supply/demand fundamentals, has been the principal driver behind higher slab zinc prices" this year. Analyst Jim Lennon at Macquarie Research in London agrees, noting that weak purchasing by the industrialized nations—primarily the members of the Organization for Economic Cooperation and Development (OECD)—continues to outweigh demand from emerging markets.
Equity analysts are projecting sustained strong LME zinc prices in coming months. Some analysts foresee a 2010 price average as high as 95¢ while the consensus forecast is an average 81¢/lb. That's up from an 85¢ average in 2008. But, "the bull run in base metals prices is showing signs of wavering," agrees analyst Andrew Young at Brook Hunt in London. "The realization that China is unlikely to continue its high level of imports of zinc and other base metals has caused uncertainty on the London Metal Exchange (LME) and prices have lost momentum." And that's why some analysts are forecasting a 2010 LME price average as low as 63¢.
Zinc metal demand has dropped 10.8% to 6.02 million metric tons through July, according to the International Lead & Zinc Study Group, while production has dropped 8% globally this year to 6.31 million metric tons. The consensus forecast has global zinc consumption for the year contracting by 8.6% to 10.24 million metric tons, the lowest annual level since 2003.
Next year, as the world emerges from recession, global use should rise 5.9% to 10.84 million metric tons. However, there is debate among analysts whether the zinc market will tighten in 2010. An early Barclays Capital report suggested that zinc might be one of the key base metal beneficiaries of fiscal spending packages. But the projected end-demand for coated steel has since ebbed in later commentaries. Lennon at Macquarie Research, for example, expects a meaningful increase in global zinc demand in 2010 as long as OECD economies "continue to recover amid robust emerging market growth," although he admits "continued deterioration of the U.S. commercial real estate market poses downside risk to this forecast."
According to an HSBC Group report from London, smelter utilization has dropped from 83% in 1998 to 77.2% in 2009 as mines have been closed and refining capacity idled in an attempt to bring supply and demand back into balance. However, analyst Edward Meir at MF Global in New York says the zinc metal market "still seems comfortably supplied" since demand isn't that strong and overall global stocks will be 1.27 million metric tons by the end of 2010, equivalent to six weeks of consumption.
Lennart Evrell, CEO of Boliden, Europe's second-largest zinc producer, points out that monthly LME cash prices have risen 56% this year as usage has outpaced production. China, which consumes more of the industrial metal than Europe and the U.S. combined, hasn't shown signs of slowing zinc-coated steel needs for building projects. However, Evrell tells Bloomberg in an interview in Stockholm that he is "personally ... concerned about China" and whether the country can sustain its rate of growth.
Excess supply is an issue since the world surplus is expected to reach 750,000 metric tons this year, almost three times what it was a year ago. According to calculations by Brook Hunt, the surplus will stay in excess of 450,000 metric tons next year "and act as a drag on the zinc price." Reason: Leading economic indicators suggest that the U.S. and other major economies have, as Young writes, "started down the long road to recovery," but actual industrial activity remains sluggish.
Justin Lennon, senior analyst for Mitsui Bussan Commodities in London, says steel mill closures outside of China severely impacted zinc consumption through mid-2009. Some restarts began in the third quarter based on expectations of customer restocking. Stocks in Europe are reported to remain high by historic standards and failed to draw down during the summer.
It is true that demand for zinc appears to be improving in early autumn in OECD countries. However, the recent restart of steel capacity may be "too quick, too soon," Daga says in the recent posting on SeekingAlpha.com. So, he suggests the zinc bull market could fade away in the face of ample supplies if the growth in demand for zinc-coated steels fails to gather momentum.
In the U.S., for example, analysts may have misread the market because of a blip in demand for galvanized sheet steel caused by a temporary increase in auto production to support sales that have since faded. Another key market, higher infrastructure spending, is showing stodgy growth. In Europe, the only noticeable improvement in galvanized sheet demand has come from the automotive market since no significant infrastructure spending is planned by European governments. It is Chinese demand for zinc that has remained strong from sustained fixed asset investment and construction sector recovery.
A buyer-member of the Linked-In online community answers a Purchasing.com question, "How easy is it to buy zinc these days?," by responding: "Will you report that speculators pushed prices up or will you say the dollar and its purchasing power simply fell, vis-à-vis other currencies? I'd go with the latter."
His commentary continues that "over time, demand/supply fundamentals are the driving force that determines price. When the dollar finally does stop falling and its purchasing power stabilizes—unless world demand (based on usage) picks up dramatically— I suggest a softening zinc market."
On the other hand, speculators believe that won't occur since China soon may be shutting smelters as part of the pollution-control efforts caused by the lead poisoning outbreak in Shaanxi province. China has one of the largest zinc ore reserves in the world and has been expanding zinc smelting operations.
What It Means to Buyers:
•Almost 5% stronger zinc demand in 2010 will cause production to expand as well.
•Mined output and refined zinc output will rise by an estimated 2%.
•However, another year of surplus of around 455,000 metric tons is forecast.
•The zinc market price will be buoyed by investment fund interest in futures trading
Zinc market records surplus in January to July 2009
The World Bureau of Metal Statistics says the zinc market was in surplus by 134,000 metric tons during January to July 2009 which compares with a surplus of 83,000 metric tons recorded in the same period one year earlier. Reported stocks rose by 183,000 metric tons with almost all of the increase recorded at London Metal Exchange (LME) warehouses. Other Bureau findings:
LME stocks represented 45% of the global total. The global demand total included a higher than expected apparent demand figure for China. According to Chinese customs data, imports for each of the latest six months were the highest monthly totals on record and it is likely that some of this material is bound for stockpiles and thus the actual global surplus is probably much more than headline figures indicate. Much of the Chinese imports originate from other Asian countries. Exports reported by Japan, South Korea and Taiwan confirm the Chinese imports.
Mine production was, at 6.50 million metric tons, 5% lower than the first seven months of 2008. Refined production fell by 513,000 metric tons to 6.26 million metric tons, with European Union countries registering a decline of 304,000 metric tons. North American Free Trade Agreement (NAFTA) regional output fell by just under 14%.
World demand was 564,000 metric tons lower than in January to July 2008. Chinese apparent demand was 2,745,000 metric tons which is 45% of the global total. No allowance is made in the consumption calculation for unreported stock changes.
Source: Purchasing.com
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