Zinc prices were the first of the LME metals to peak in late 2006 and prices have more or less trended lower since that time. The driver of the swing was the increase in zinc supply experienced in 2007, in reaction to the exceptionally high price environment. This took the market out of the structural deficit it saw throughout 2004-2006, initially to a near-balanced position in 2007 and eventually to a sizeable surplus last year and through to the present time, that saw LME stocks increase by 270,000 tonnes (from the start of 2008 through to mid March this year).
Market Fundamentals: However, there some positive signs emerging, particularly from the supply side that suggest that the worst is behind the market from a fundamental standpoint. Looking at LME inventories for instance, despite the increases they only represent about 2-3 weeks' consumption, which is low from a historical perspective compared to previous downturns. Certainly we view the downside as being limited. As prices are now between the 60th and 70th percentile of the cost curve the supply response is currently gathering momentum. GFMS Metals Consulting projects a 4.3% decline in global mine output in 2009, followed by relatively modest gains in 2010 and 2011. This is based on a numbers of factors:
1: A number of the closures that have been announced can be considered permanent, or unlikely to be back in operation in the forecast period. This includes projects such as Lundin Mining's Galmoy mine in Ireland and Teck Cominco's Lennard Shelf operation in Australia.
2: It is always difficult to forecast the timing for the restart of capacity that has been idled in the downturn. However, some of the small scale projects were only in operation for a short period during the bull market and we doubt whether these will be brought back onstream before zinc prices have been high for some time.
3: Many of the projects that have been idled are owned by junior mining companies and raising finance may prove to be an obstacle to an early restart.
4: In China, we are not aware of any large-scale mining projects that will boost production. We have only factored in modest increases following the 4.5% rise in 2008.
5: A lot of the large-scale zinc projects under consideration are in economically and politically unstable countries and/or are in increasingly inaccessible locations. As a result, we no longer expect that projects such as Herald Resources' Dairi mine (Indonesia) and Aim Resources' Perkoa project (Burkina Faso) will be developed before 2012. Another reason to be cautious about the timing of new greenfield projects is that they are being developed in many cases by junior mining companies.
6: Towards the end of the forecast period, the exhaustion of existing mines may become an issue. The most notable example of this is Xstrata's New Brunswick mine.
Following on from our analysis of the concentrate market, GFMS Metals Consulting is projecting a 2.5% decline to refined output in 2009 following the 2.9% increase in 2008. In 2010 and 2011, a relatively tight concentrate position should limit gains in production to 2.2% and 2.3% respectively. We do not believe that there is a shortage of smelting capacity. Therefore our projections are predicated on producer restraint at the concentrate stage. Market outlook GFMS Metals Consulting forecasts a surplus of 210,000 tonnes in 2009. This surplus will overwhelmingly occur in the first and second quarters of the year. In fact, the zinc market is forecast to return to a small deficit in the second half of the year. In terms of prices, although prices are likely to retreat from the mid March levels of in excess of $1,250/tonne, GFMS Metals Consulting believes the downside will be limited. Any moves back below $1,100/tonne would likely trigger a further supply response. As the market moves to an essentially balanced position in the second half of the year, we expect prices will recover. Zinc prices are seen averaging $1,200/tonne and $1,300/tonne in Q3 and Q4 respectively leading to an average for the year of $1,150/tonne. In 2010, spot prices are expected to trade in a much wider range between $1,100-$1,800/tonne and will average $1,550/tonne over the year overall.
