RO Article: "The Investment Case For Zinc"This article was taken from the July 2004-2 Issue of Resource
Opportunities
Zinc Market Overview
Zinc is significant to investors as it is an important component in
many silver deposits. The potential value of those silver deposits
depends heavily on the outlook for the zinc market.
Zinc is one of the most important of the base metals, with an
essential role in a wide range of industrial and consumer
products.
Like the other base metals, zinc is just recovering from a period
of low prices. Zinc was hit especially hard, as two big new zinc
mines came into production just as China was ramping up
exports and the western world was headed into recession. The
substantial oversupply of metal pushed the zinc price down to a
level not seen for at least a decade.
During that period of low prices, little was done to develop new
sources of supply. Existing mines are being steadily depleted,
with some major mines due to be shut down over the next few
years.
Demand for the metal is growing steadily as the western world
once again experiences economic growth. At the same time, the
rapid economic growth in China has made that country the
biggest user of zinc. China has recently gone from a zinc
supplier to a net importer. That reversal has enormous
implications for the zinc market.
Consumption Is Growing Steadily
Only iron, aluminum and copper are used more extensively than
zinc. The biggest single use of zinc is for galvanized steel. A thin
coating on steel products makes the steel resistant to rust and
corrosion, and thereby greatly extends the life of the product.
Today, nearly all cars in the western world are made with
galvanized steel. Importantly, more and more cars in most other
parts of the world are also being galvanized. Galvanized steel is
also used extensively in construction and many other
applications. Zinc is also used for die-cast components, from
door handles and carburetors on cars, to children's toy cars, and
thousands of other products such as casings for electronic
components. Zinc is also alloyed with copper to make brass
which is used in a vast array of products.
The multitude of other uses of zinc includes sun screens,
phosphors on TV screens, fireworks, paints, cosmetics and
plastics. That rapidly growing list of applications is steadily
adding to the importance of zinc in the industrial world.
Consumption rose at an average of about 3% per annum for a
decade before the 3.6% decline in 2001. Presently, the world
consumes about 7.5 million tonnes (16 billion pounds) per
annum of zinc.
Economic recovery in the West and the phenomenal growth in
China and other parts of Asia is pushing the growth in
consumption back to or above the long-term growth trend. As a
result, the mining industry needs to bring on about 225,000
tonnes of new capacity each year simply to satisfy the growth in
demand.
Developing Enough Supply Will Be A Challenge
In addition to the 225,000 tonnes of new capacity required to
meet the growing demand for zinc, the mining industry must also
find and develop new mines to replace depleting mines.
Present projections show that about half of today’s production
will be depleted within the next decade. The zinc industry is
highly fractured, with 266 mines in production. Fewer than 20 of
those mines produce more than 100,000 tonnes per annum, a
level that would be of interest to a major. Many of the smaller
mines are in China, and are facing growing challenges to meet
more stringent environmental and safety standards.
After the start up about four years ago of Antamina (280,000
tonnes per annum) and Century (600,000 tonnes per annum),
little has been done to increase productive capacity in the
western world.
During the period of low zinc prices, producers struggled to stay
in business, with exploration for new deposits seen as an
unnecessary luxury. In fact, not all of the producers survived, as
Pasminco, one of the biggest producers, went bankrupt in
September 2001.
Over the next few years, the mining industry will need to bring on
two new 100,000-tonne-per-year mines each year to meet the
growth in demand plus another couple of big new mines each
year to replace depleting mines.
The Investment Case For Zinc
Demand for zinc is expected to continue to rise steadily, with the
biggest portion of the increase coming from the rapidly growing
economies of China and India. Even as demand grows, existing
production will decline as mines are depleted. As a result, new
mines are required to satisfy the market.
Raising the capital to develop new mines will require sustained
strength in the zinc price at a level above the current $0.45 a
pound. Conversely, if new capacity is not brought on, the price
will move well beyond that level as supply shortages develop.
In summary, the zinc price should remain at or near the present
level at least through a mine development cycle – two to three
years, or longer.