A new dawn for zinc?

The slow motion zinc revival is gathering pace, but not all experts are convinced it will continue.

Summary: The zinc price has continued to gain momentum, and this week it broke through the key psychological barrier of $US1 a pound for the first time in three years. But central to the debate over whether zinc will keep rising is the global stockpile of the metal, the demand for galvanised steel, and the role of price manipulators.
Key take-out: With few pure zinc plays listed in Australia, the challenge for investors will be finding entry points that are well positioned to benefit from further price rises.
Key beneficiaries: General investors. Category: Commodities.

It’s taken longer than expected, and might not last as long as hoped, but a revival in the mining world’s least loved metal, zinc, appears to be underway.

The zinc price this week crossed the key psychological barrier of $US1 a pound for the first time in three years.

Like nickel, its associate in the category known as base metals, zinc has been dogged by a worldwide oversupply which has clogged warehouses and weighed down the price.

Since it last traded above $US1/lb in mid-2011 the zinc price has been stuck close to US80c/lb, occasionally venturing above US90c/lb thanks to reports of future mine closures, which will crimp supply, and speculation about stockpiles being used in financing deals that might have removed the metal from circulation.

However, since late last year when we wrote about the Stirring in the zinc pot, what started like an early minor improvement in the price has gathered strength, with a US2c/lb rise on Wednesday pushing zinc over the $US1/lb barrier, which is where it is today.

The price rise has been matched, in almost perfect symmetry, by a fall in the stockpile kept in the warehouses of the London Metal Exchange which, since late last year, has dropped by 28% from 930,000 tonnes of metal to 666,775 tonnes.

Whether the zinc price can hold onto its gains is a question being debated in the metal-trading industry, with no clear agreement on the future direction.

Opinions are divided between a belief that zinc will mimic nickel and continue to rise, with $US1.20/lb its next target, and an argument that the rise above $US1/lb is another of the false dawns for zinc seen over the past three years.

Central to the debate are the issues of uncertainty about stockpile levels, the demand for galvanised steel, which is the dominant use of zinc as it acts as a protective steel coating, and whether the price is being manipulated by the financing deals troubling the Chinese shadow-banking sector.

Those discussions in the zinc industry about the reliability of stockpile data and doubts about the impact of mine closures is reflected in the share prices of the handful of zinc-exposed stocks listed on the Australian Securities Exchange.

Most zinc stocks are up, but modestly, and they are broadly in line with the overall resources sector, which gained 3% during June. Two stocks which outperformed the market were Ironbark Zinc (IBG) and Aurelia Metals (AMI), which added 28% and 10% respectively.

Ironbark rose during June from 4.9c to 6.2c. Aurelia (the renamed YTC Resources), rose from 23.5c to 26c.

What followers of those stocks are keen to see is whether the overdue rise in the zinc price can be sustained in the same way the price of nickel has held on to its 47% price rise from around $US6.10/lb late last year to last night’s $US8.98/lb.

The factor driving nickel is “political”, in the form of an Indonesian Government’s ban on the export of unprocessed ores such as bauxite, the ore of aluminium, and low-grade nickel ore. This has become the ore of preference at some Chinese stainless steel mills, which upgrade material assaying as low as 1% metal into a semi-processed state call Nickel Pig Iron.

The key difference between the nickel and zinc markets is the potential for an Indonesian Government policy change after the election of a new president next week. If the export ban is dropped, so will the nickel price.

Zinc is not reliant on the actions of a single government, being influenced almost entirely by supply and demand factors which include:

  • A report by the International Lead and Zinc Study Group, an industry organisation, that the zinc market flicked from surplus to deficit last year for the first time since 2006, with steel mills now busily consuming the stockpiles of the LME and stockpiles in private hands.
  • The planned closure of several big zinc mines, which are running out of payable ore. These include Queensland’s Century mine, which is scheduled to finish mining next year, following on from Canada’s Brunswick mine, which closed last year, and
  • A lack of major new mines, with the only indication of mining companies moving to plug the forecast supply shortfall being the planned re-opening of the small Pend Oreille mine in the US by Canada’s Teck Resources, and the equally small Caribou mine of Trevali Mining in Canada.

Regular Eureka Report readers will remember that the zinc revival story has been lurking in the background for some time, including a reference to zinc in a January 13 story this year (Base metals to shine).

Our zinc-specific story last November covered the argument for a future rise in the price, which has been slowly arriving, and the observation that in the last price revival between 2004 and 2007 zinc rose from $US38c/lb to $US1.50/lb – before suffering the same fate as most commodities when the 2008 global financial crisis struck.

This time round there appears to be more substance to the forces driving the zinc price, with a number of senior executives of zinc-exposed mining companies talking up the prospects of the metal – which is what you would expect.

Andrew Michelmore, chief executive of Chinese-owned MMG, argued last year that zinc was a better recovery story than copper because “oversupply is shrinking sharply”.

Michelmore said then that the zinc surplus ended late last year and that “in 2014 you’re going to start seeing it get tighter”. He’s been right, so far.

The world’s biggest zinc bull, Glencore chief executive, Ivan Glasenberg, has been talking up zinc for the past three years, with the time of the recovery the missing link in his strident claims of a looming shortfall as old mines close.

Set against the understandably optimistic views of producers is the concern of investment banks, with the chief zinc bear being Leon Westgate in the London office of Standard Bank, who this week told the Reuters news agency that the price rally “appears to be a bit half-hearted in nature”.

What worries the zinc bears is the lack of transparency in the stockpile data and uncertainty over movements in large volumes of metal in LME warehouses, leading to a comment that there “seemed to be a lot of zinc still sloshing around the system”.

Whether zinc has finally reached a tipping point is something for investors with an interest in a metal to consider.

Zinc was once one of Australia’s most important exports and a key factor in the birth of Broken Hill, and some of the world’s biggest companies including BHP Billiton and Rio Tinto. It is far less important today.

On balance, the pendulum appears to be swinging towards a recovery of more substance than the 2004-to-2007 price bounce, with the challenge this time around being to find investment entry points after several years of drought in the zinc equities market.