Teal Valley T.TV

Financial Times: Zinc price rise heralds rush for new mines

[shakerman640]

https://www.ft.com/cms/s/0/83a025a8-f492-11e4-9a58-00144feab7de.html

Zinc price rise heralds rush for new mines

By Henry Sanderson

Forty-three miles from Milan, an Australian company is busy resurrecting a zinc mine left dormant since the 1980s.

Energia Minerals is reopening the Gorno facility in the mountains of northern Italy to take advantage of a rebound in the price of zinc, a base metal used to protect steel against corrosion, brought about by fears of an imminent supply crunch.

“It’s going to be zinc’s time in the sun,” says the company’s managing director Kim Robinson. “There’s been no exploration for a while and major deposits around the world are starting to run down and go out of production.”

The restart of the Gorno mine is the latest sign of improved sentiment towards zinc, which has also been boosted by the recent weakening of the US dollar. The metal has risen 7 per cent this year in trading on the London Metal Exchange, close to its three-year high of $2,415 a tonne in July.

Investor interest has increased in recent weeks, which is reflected in the sharp rise in open interest, or the number of futures contracts, on the London Metal Exchange, according to Capital Economics. The futures curve has also moved into backwardation, where prices for immediate delivery are higher than those for the future, suggesting a near-term shortage of supply, they said.

Shares in European zinc producer Nyrstar have risen 19 per cent this year. Commodities trading house Trafigura has spent €200m building a 15 per cent stake in the company, and last month succeeded in appointing two non-executive directors to the board. That could help Trafigura secure zinc supplies that have already been secured by rivals Glencore and Noble, according to analysts.

The run-up is being driven by the impending closure of the world’s two biggest zinc mines — the giant Century deposit in Australia and Lisheen in County Tipperary, Ireland.

“There are no new big zinc mines coming up in the world and there is demand growth. We think zinc is moving into a deficit,” Ivan Glasenberg, chief executive of Glencore, one of the world’s biggest producers of zinc, told shareholders last week.

Analysts expect a deficit of 145,300 tonnes this year, according to a survey by Reuters.

However, many market participants remain wary of the supply-crunch narrative.

“Zinc always seems to disappoint and the story about tightness is always two, three, four years away,” one trading house executive said. “At the moment I have no reason to be too bullish on zinc.”

On the surface the fundamentals in China look supportive. Analysts say supply of zinc from the country, which accounts for 30 per cent of global supply, is likely to slow as costs and environmental regulations get tighter. At the same time overall zinc demand in China is expected to increase 4.9 per cent in 2015, according to BMO Research, citing an estimate from state-owned China Minmetals.

However, China’s zinc industry is notoriously opaque. As such it is difficult to estimate how much zinc is sitting in warehouses and the degree to which producers of galvanised steel will cut back on zinc coating as prices go higher, according to Jessica Fung, analyst at BMO.

Indeed, stocks of zinc tracked by the Shanghai Futures Exchange have also been rising this year, suggesting ample inventory. Outside China, a drawdown in stocks of the metal in warehouses in New Orleans monitored by the London Metal Exchange likely reflects relocation to cheaper storage rather than real consumption, analysts say.

The rally in the LME benchmark price may be driven by financial speculators, market traders say. Premiums, the extra cost for actual physical delivery of zinc to consumers, remain weak indicating a well-supplied market, they say.

Another big question mark is the degree to which China can lift production, both mined and refined, in response to higher prices.

Zinc mine supply is projected to accelerate in 2015 with consultancy Wood Mackenzie projecting a 5 per cent growth, the highest level for five years, with the most significant additions expected to come from China and Peru.

“Will the zinc market end up in a deep deficit because of Century and Lisheen? As long as the funds pay these prices then maybe not,” one analyst said. “Maybe that will preclude the deficit and the tightness that some people say this rally reflects.”

None of these concerns are deterring Energia Minerals, which says its Gorno mine can be put into production easily and quickly, with expected zinc content of 57 per cent to 58 per cent. Eni, the previous owner of the mine, even left the “boggers” in place to extract the ore when the government forced it out of the metals business in 1985, Mr Robinson said.

“You can just see the cycle extending for a lot longer than the previous one. I’ve been in the business for as log as I can remember — I’ve been through a couple of cycles,” Mr Robinson said.