LONDON () -- Zinc was one of the star commodities from 2002-2006 with prices more than quadrupling over the period. This year, however, the tables have turned; zinc has been the worst performing of the major metals plummeting 35% from over $4,000/tonne at the beginning of the year to below $2,700 on September 10th.
While it has since recovered to $3,100/tonne, "we are now looking at the possibility of steep decline in zinc prices", according to Claire Hassall, from the lead and zinc consultancy CHR Metals when she presented at the recent Mining Journal's 20:20 zinc day.
The recent history of zinc will be a familiar story to anyone in the metal markets.
After years of low prices in the 1990s when prices barely covered production costs there was no incentive to build up capacity.
So when demand from China and India took off at a higher rate than anticipated the industry was caught short and there was a massive shortfall of supply.
During 2006 inventories plummeted and the price peaked at $4,620/t in November 2006, more than five times its 15 year low in 2002.
Supply and Demand Response to Higher Prices
But both the supply and demand of zinc have followed a predictable response to the high prices.
On the supply side there has been a rush to increase capacity to take advantage of the high profits in the business. There has already been a significant production increase this year.
Figures published by the International Lead and Zinc Study Group show that production from January to July is 9% up on the equivalent period last year. Supply is likely to increase even further in the near future on the back of:
- A number of start-ups this year including San Cristobal mine in Bolivia (which is jointly operated by Apex Silver Mines [AMEX:SIL] and Sumitomo Corporation) and the Cerro Lindo in Peru (Compania Minera Milpo).
- Several reactivations of mines which were previously thought to have been permanently closed. Examples include five mines in Tennesse which have been acquired by Strategic Resource Acquisition Corporation [TSX:SRZ], HudBay Minerals' [TSX:HBM] Balmat mine in New York state, Breakwater Resources [TSX:BWR] Langlois mine in Quebec and Teck Cominco [NYSE:TCK; TSX:TCK-B] / Xstrata's [LSE:XTA] Lennard Shelf in Australia.
- A possible supply response from China which accounts for over a quarter of world supply. Chinese supply already increased strongly in 2006, mostly from production by small mines.
Zinc has been able to respond more quickly to shortages than other metals as zinc orebodies tend to be small and so involve relatively lower barriers to entry, lower capex and fewer delays caused by the tight availability of resources than other projects.
On the demand side high prices have already led to some substitution away from brass in the plumbing sector though this may have been driven primarily by high copper prices. There is also some possibility that the consumption of zinc oxide in rubber could be reduced or that aluminium die-castings will be substituted for zinc.
Demand has also been hit this year by a mid-cycle correction in North America and Europe and by slightly slower growth in China, though at 11% growth is still likely to be strong. CHR anticipates that world demand growth will slow from 7.4% in 2006 to 4.4% in 2007.
Since reaching a 16 month low of $2,699/tonne on 10th September the zinc price has recovered to $3,100/tonne on the back of the general recovery in the metal sector, declining inventories, supply disruptions after the fire at Xstrata's Mount Isa zinc-lead concentrator, and threatened strikes in Peru in November.
Zinc is thus "clinging on" to its current price level according to consultancy Virtual Metals, who state in its latest metals reports that all eyes are now fixed on China which holds the cards for both lead and zinc (it accounts for a third of world demand of both metals and will produce 38% of world lead production and 28% of world zinc production next year).
Medium and Long-Term Outlook
Zinc demand is likely to continue rising quite strongly from its current annual level of around 11 million tonnes. CHR Metals is forecasting that demand will grow by 4 million tonnes in the decade from 2000-2010 (equivalent to 3.8% per annum) and then by the same amount in absolute terms (4.1 million tonnes) in the ten years to 2020 though this will represent a lower annual growth rate of 2.8% per annum with some 70%-85% of the growth will coming from China and India according to the consultancy.
Meanwhile on the supply side existing mines and secondary sources will not be sufficient, on their own, to meet demand. However as already discussed the higher prices have acted as a massive incentive to develop and reactivate mines, and the pipeline of projects due to come onstream from 2008-2010 is now quite full. While individually these are all small projects - the only new project of significant size, San Cristobal, is already in production - if all goes according to plan then collectively they will add significantly to zinc supply in the next three years.
The chart below shows CHR's estimates of supply and demand where supply is broken down into existing mines, committed projects, likely projects and probable projects. It can be seen that 2007 represents a turning point where the industry is projected to move from shortage to surplus which may last for 2-3 years or more depending on the extent to which project plans are fulfilled.
Claire Hassall anticipates therefore that prices will essentially trend downwards quite steeply for several years though there is potential for upward corrections as and when there are supply disruptions which may be brought about by competition for equipment and people in the current high price environment for metals or by labour disputes.
However zinc mining is highly profitable with current prices well above the cash operating costs of even the highest cost mines as shown in the cash operating cost chart below from Minecost.com. Zinc mines will therefore have the potential to make significant profits even if the price falls particularly when credits from other metals such as lead and silver are taken into account.
The 10 largest miners in zinc last year according to estimates by CHR Metals are tabulated below. Together they account for 42.5% of world production.