This a longer version of the article just posted by Crucible401. The article calls for large zinc surpluses in 2010 but sizable deficits after 2011. The article suggests that current zinc prices are reflecting anticipated longer-run shortages. The authors call for global consumption in 2010 similar to 2007 levels.
Elsewhere, folks are suggesting that oil and other commodities are being viewed as good hedges against inflation and a weakeing US dollar. Would that motive apply to zinc? Don't think so. Nickel has been looking bullish lately but I am not aware of any impending supply issues. -TR
China fuels global zinc demand and supply
Published on: March 25, 2010 at 15:10
Demand for zinc will be led by China, growing at an estimated 8% in 2010, to almost 4.5 Mt, while the rest of the world will also see demand rise year-on year, once fiscal stimulus measures gain momentum, says a report from VM Group research for Fortis Bank Nederland, published in Metals Monthly March 2010.
LME three-month zinc prices rose by 125% in 2009 on the back of strong Chinese demand and fund investment seeking good returns in the near zero interest rate environment, ending the year at $2,596/t. However, 2010 threatens to end the one-way bet. Our estimate that the three-month price will average $2,217/t in 2010 belies the acute volatility we expect will shape the base metals’ markets this year, with zinc in particular being vulnerable.
Producers have restarted idled zinc supply rapidly over the past few months, even though demand outside of China remains lethargic, while the construction of new production capacity is accelerating. This ought to point to a period of price weakness, to rein-in supply and beef-up demand, but prices in the opening months of 2010 have remained firm, apart from the short-lived sub-$2,000/t correction in early February. Why has the price remained so firm while the supply-side is building up a fresh head of steam? The answer, we suspect, is related to the new dynamics that have come to shape the base metals markets in recent years, with investor-driven demand based on expectations of tighter market conditions ahead, keeping prices above equilibrium.
This was never more evident than in 2009. The non-commercial investment support for some base metals remains firmly wedded to the view that demand is going to remain stronger for longer, and has to some extent priced this long perspective into the market. Zinc, like copper, has very favourable prospects in the longer term, and this has garnered it support among the investment community, in a period where immediate fundamentals suggest otherwise.
The elevated price level could create an environment whereby miners and smelters are encouraged to ramp-up supply way more than is justified by current physical demand, threatening that the zinc market surplus remains high in 2010, at approximately 325,000t, against some 690,000t in 2009. Judging by the weak level of industrial recovery in the US and Europe to date, and the unlikely scenario that China will repeat last year’s extraordinary level of demand, our estimate may be on the conservative side.
Last year Chinese consumption grew by 18%, to more than 4.7 Mt, according to the International Lead and Zinc Study Group (ILZSG), which resulted in a huge rise in zinc imports that soaked up much of the global surplus. In real terms, and from a lower base than that estimated by the ILZSG of about 3.7 Mt, we estimate Chinese consumption grew by as much as 11% in 2009, to 4.1 Mt. If we add into that China’s reported refined zinc production and net imports of refined zinc, the total figure was 5 Mt, leaving an overhang of as much as 900,000t of excess metal – all of which we suspect has gone into stocks. This year, real Chinese consumption growth is likely to slow to about 8%, to ~4.5 Mt, while US and European demand may bounce back slightly, but only when measured against 2009 levels – consumption will still be markedly down from previous years.
Our current estimates for zinc supply in 2010 is for mine production to rise by as much as 6.4% on year-ago levels, to 11.71 Mt, as a number of operations restart and new supply comes online via either new projects or mine expansions. Refined production will rise by a more modest 3.4%, to 11.54 Mt, although capacity will raise considerably more, due to smelter expansions and new Chinese facilities. Global demand meanwhile will grow by about 7% year-on-year, to 11.2 Mt, as the Chinese construction and automobile sectors continue to flourish under Beijing’s stimulus package and relatively loose monetary policies, and while OECD economies emerge from the gloom of 2009.
New mines, expansions and mine restarts could add as much as a net 704,000t of zinc mine capacity to the market in 2010 (see table). This includes some 320,000t of new, restarted or expanded Chinese output, the continued ramp up of Hindustan Zinc’s Rampura Agucha mine, Minmetals’ Century mine in Australia and the restart of Glencore’s Tennessee mines in the US. Losses include a 25% fall in output from Peru’s Antamina mine, which has recently been given the go-ahead for a $1.3bn expansion, and the closures of the Galmoy mine in Ireland as well as the Iscaycrus operation in Peru, among others.
With regard to refined supply, China will drive global growth, adding more than 350,000t to total output capacity this year. This will include the expansion of Bayi Zinc Co’s Hanzhong plant; the ramp up of Baohui Group’s Huixan smelter; the expansion of the Dongshengmiao smelter; and the ramp up of Zhuzhou’s direct leach operation. Other potential capacity expansions derive from a number of new smelter projects, namely Yunnan Metallurgical Group’s Hulunbuir smelter and Xing’an Smelting’s Xilingol plant. Outside of China, smelter restarts might add as much as 500,000t, including Nystar’s Balen plant in Belgium, and the expansion of Votorantim’s Cajamarquilla operation in Peru. Overall, this will add as much as 900,000t/year of output capacity in 2010.
Demand for zinc will be led by China, growing at an estimated 8% in 2010, to almost 4.5 Mt, while the rest of the world will also see demand rise year-on year, once fiscal stimulus measures gain momentum. Japanese zinc demand could see as much as an 11% rebound year-on-year, while the key markets of the US and Europe may record growth as high as 15% and 10%, respectively v. 2009, but signs to date from the key construction and automobile sectors suggest that consumption may fall short of this growth estimate. Relative to 2008 and 2007 levels however, Japanese, US and European zinc demand will still be down by 15%, 14% and 11%, respectively, from 2008, and 8%, 7% and 6% on 2007. Nevertheless, global demand, thanks to China, will more or less be on par with that of 2007.
Golden prospects
So we are facing the prospect of a large market surplus in 2010, which ought to be extremely negative for prices; but immediate fundamentals are largely being ignored, due to zinc’s promising medium to long-term prospects. The zinc concentrate and refined markets are heading for sizeable deficits after 2011, as demand grows rapidly in emerging economies and numerous mines reach the end of their life, with little new committed supply in the pipeline.
Maybe this long-term demand growth view will prove to be correct, although it is basing itself almost entirely on the view that emerging market growth – particularly in Asia – will continue its recent trajectory. Demand growth from the US and Europe ought to be largely discounted, since consumption rates 2000-2008 have been either flat or in decline. Thus, zinc’s longer-term demand prospects lie with the rate of industrialization in emerging economies.
Is this a reasonable assumption? Quite possibly. Discounting 2009, China’s zinc consumption has grown at an average annual growth rate of 13.5% since 2000. From 1.35 Mt in 2000, we estimate China will consume 4.5 Mt in 2010. In the event that China continues on this path, then by 2020 it could be consuming as much as 14.5 Mt of zinc – or 30% more than the world consumed in 2008. This is not altogether fanciful, since China requires an enormous level of infrastructure development relative to the developed world, with its far fewer airports, roads and railways per capita, while its urban population could increase by 150m by 2020, according to UN estimates. This will require a huge amount of new construction, in which zinc demand must soar through its use in galvanized steel..However, supply constraints, and perhaps a tighter monetary policy by Beijing in the coming decade, may slow the rate of China’s zinc demand. Nevertheless, even on a much slower average annual demand growth rate of 5%, China will still be consuming 6.7 Mt of zinc per year by 2020. There will also be an appreciable rise in Indian zinc consumption, averaging 6% over the next decade, and from other major emerging economies. Altogether, this could push up world annual zinc demand growth to an average of more than 3%, to about 15.5 Mt/year by 2020. This will require a 3.5 Mt/year jump in refined zinc output and a more than 4 Mt/year rise in zinc mine supply above current levels.
Taking into account all the uncommitted and committed supply projects currently in the pipeline, the zinc market profile therefore appears extremely tight going forward, especially in the period from 2012-2016. The zinc concentrate market, including all committed and uncommitted mine supply, has the potential to move into a surplus of more than 400,000t in 2013, but without uncommitted supply, or part thereof, this surplus would fall to just 100,000t. By 2014 we could be facing a zinc concentrate market deficit of as much as 500,000t, rising to ~3 Mt by 2016. This will depend on total smelter production capacity and utilization rates, but here too we find a deficit against estimated consumption, even taking into account existing operations, closures, expansions and committed and uncommitted new capacity.
By 2012, and accounting for disruptions and other production losses, the refined zinc market balance could potentially show a deficit of as much as 100,000t tripling by 2013-2014 and declining only slightly, to 200,000t, in 2015-2016. Should zinc mine supply fall short by as much as 3 Mt in 2016, then the refined zinc market could be plunged even further into deficit, as concentrate supply is insufficient to feed available smelter capacity. Of more concern is the fact that it can take up to ten years to bring a mine into production; even if all uncommitted projects go ahead, it looks likely that the refined zinc market is still heading for a slight deficit over the next several years.
We estimate that almost 2.4 Mt/year of zinc mine production will close between 2011 and 2016, providing the Skorpion mine in Namibia, the Tara and Lisheen mines in Ireland, Perseverance and Brunswick mines in Canada and Cerro Lindo operation in Peru, among many others, are closed as currently planned. Expansions announced to date only account for an additional 650,000t/year over the same period and new committed projects another 300,000t/year. Another 1.75 Mt/y exists in potential uncommitted mine projects.
Higher market prices will obviously encourage investment into new mine supply, but not without significant time lags. The recession has delayed such investment, but if the price stays high, then we foresee a rush to bring through new mine capacity over the next decade, or otherwise face a sustained market deficit. Current prices are therefore not without substance, despite near term fundamentals looking decidedly negative. We forecast zinc to average $2,825/t in 2011, $3,575/t in 2012 and ~$3,500/t in 2013. However, risk is to the upside, barring a double-dip scenario or some significant pause in the China growth story.
Courtesy: VM Group research for Fortis Bank Nederland - Metals Monthly March 2010