Title Zinc market outlook 2012 Degree of recognition National Media name/outlet ResourceStocks Magazine - Aspermont Media type Duration/Length/Size 1 page Country Australia Date 1/08/12 Description This month Allan Trench goes ‘mainstream’ and looks at zinc – with signs of a potential price squeeze ahead.
‘Digging Deeper’ has until now focused on the minor metals of the Periodic Table. This month however we switch gears to move somewhat closer to the mainstream – to zinc – as the signs of an upturn in price for the galvanising metal in the medium term look increasingly compelling.
Although an established and sizeable global market (12 million tonnes in 2011), zinc has traditionally been one of the lesser lights among metals for mining investment. This is despite periods when zinc prices have spiked spectacularly in the past – the most recent of which was in 2006 and 2007.
Zinc’s principal uses are for galvanising (anti-rust coating), which is by far the greatest end use consumer, in die-casting alloys, brass, and as rolled zinc. Galvanised steel is used in the automobile industry to increase the corrosion resistance of vehicles. Galvanised steels are also used extensively in construction and engineering applications and in the manufacture of white goods. No prizes for guessing that China is the largest consumer of zinc, anticipated to reach 5,000,000 tonnes by 2012, with recent and forecast Chinese consumption growth for zinc far greater than across the western economies. Western Europe is the next largest consumer at around 2,000,000 tonnes per annum. By contrast and for comparison, Australasia’s zinc consumption sits at around 250,000 tonnes per annum.
Investors may not realize it but the system for financing mineral projects actually acts to accentuate year-on-year price volatility in the base metals sector. Zinc is the most compelling instance at present across the base metals spectrum with future mine supply looking tenuous. New mines are needed to avoid a looming shortage of future metal inventory.
Modest prevailing zinc prices and a market surplus of 2011-2012 metal leaves banks wary to support the financing of new projects. This is despite analyst’ forecasts of markedly higher zinc prices by around 2015 as supply fails to keep up with projected demand.
Zinc is traded on the London Metal Exchange up to 63 months forward with zinc concentrates traded internationally between miners and smelters under both offtake agreements and as spot cargoes. Producers of zinc concentrate are paid for the majority of contained zinc in the concentrate, minus a deduction, but pay a treatment charge to the smelter together with an escalator indexed to the prevailing zinc price.
Producers of concentrate are also paid for by-products, such as lead and silver. Typical traded concentrates grades are around 50 per cent zinc per tonne.
Globally, zinc producers are split between those companies with significant mine output – and those with significant zinc smelter capacity. Whilst several companies are fully integrated from mine to metal, the split still serves as a useful delineation.
Major miners of zinc globally include Canada’s Teck Resources, India’s Hindustan Zinc, , international metals trading house Glencore, diversified miners Xstrata , Anglo American, BHP Billiton and Sweden’s Boliden. Major smelting companies include Nystar, Korea Zinc Group, Hindustan Zinc, Votorantim, Boliden, Penoles, Mitsui and Toho Zinc.
There are a number of commercial zinc ores, with the most important being sphalerite (ZnS2) and smithsonite (ZnCO3). Zinc commonly occurs with other metals, with lead-zinc-silver the main association in Mississippi Valley Type deposits (MVTs) and copper-zinc-gold-silver in volcanic massive sulphide (VMS) deposits. Investors should note that for zinc/lead deposits, grades of combined metal that exceed 10 per cent are considered attractive. Mine grades of zinc at high-grade mines can exceed 20 per cent however.
Zinc is shaping as one of the potential commodity market ‘hot spots’ of the future – meaning that zinc prices could rise in the period through to 2014-15. The immediate conundrum however is that for 2012 at least, analysts view the zinc market as likely to be in surplus – meaning there will be more zinc metal supply produced than is required to meet 2012 zinc metal demand.
So how does one reconcile a surplus market with a ‘hot’ market? At first glance it appears to make no sense. Surplus, that is over-supplied markets are generally associated with low commodity prices. The answer – if analyst consensus is correct –has its origin not so much in the immediate 2012 zinc market balance but in the outlook for that market balance.
With consumption growth to continue driven for the most part by China, more large mines are needed as a number of major western mines, including the Century mine in Queensland, reach maturity and wind down production.
Investors can look to a number of ASX-listed companies with current and future exposure to a rising zinc price. These include producer Perilya Mines (PEM) then a growing list of companies with advanced zinc projects including Alara Resources (AUQ), Argent Minerals (ARD), Blackthorn Resources (BTR), Ironbark Zinc (IBG), MacPhersons Resources (MRP), Overland Resources (OVR), Terramin Australia (TZN) and Venturex Resources (VXR).
Producer/Author Allan Trench Persons Allan Trench