Zinc: Bullish fundamentals to start impacting markets in 2014

The other part to the supply picture is China, where growth is slowing sharply. After years of double-digit percentage growth, mine production grew only 4% in 2013.

The long anticpated supply tightening in zinc is emerging as recent zinc mine corporate data suggests, according to Barclays Plc.
Barclays which tracks close to 20% of global supplies reported that major zinc producers have reported 4% lower production on a year on year basis with ouput contracting at half the mines.

"During 2013, zinc performed fairly better than its peers from the base metals complex, fetching a marginal negative return of 0.57%. In the year 2011, zinc prices plummeted by 24%, the most among other base metals on the back of supply surplus and high legacy inventory," according to Nirmal Bang Commodity Year Book 2014.

At India's Multi Commodity Exchange, Zinc for February delivery has fallen from a high of Rs 130.35 last week to Rs 126.40 on Monday trading.

Mine supply data
-GlencoreXstrata's Q4 13 results show production dropped 9% y-o-y t due to shuttering of two big mins Perseverance and Brunswick.
-Blackthorn Resources has suspended open pit opertions because of weak metal prices and unaccpetable financial results.
-Data from the International Lead and Zinc Study Group (ILZG) this week further illustrated
the softer ex-China production performance: ex-China mine production did not grow at all
in 2013.

The other part to the supply picture is China, where growth is slowing sharply. After years of double-digit percentage growth, mine production grew only 4% in 2013. That’s even slower than the official data suggest; NBS data show Chinese production up 9% y/y. In the past, Chinese production tended to surprise to the upside, and that certainly remains a risk.

"We think some mines could resume production given a strong enough price signal, but this is only likely at the margin. The industry is fragmented, inefficient and suffering from a sharp decline in ore head grades. Thus, the scale and sustainability of any future upside supply surprises are likely to be limited and high-cost.

"Overall, we think the parts are starting to fall into place for supply-driven tightening in zinc fundamentals. However, we expect this to develop gradually. Concentrate and refined metal stocks will provide an initial buffer: we estimate unreported stocks of refined metal built by 600Kt last year, for instance. It could attract on-exchange during periods of tightness in spreads, which happened nine times in 2013, and could restrain backwardations, temporarily at least. We think there are reasons to be bullish on zinc prices on a 12-month view and see more than 10% upside between now and the end of 2014, with most of that happening in H2 14 with Q4 14 prices forecast to average $2,200/t," Barclays report said.

Nirmal Bang Pvt Ltd, a leading broking house said in its Commodity Year Book 2014 that the global refined zinc market is currently under-supplied by 18,000 tonnes in the January-November period of 2013 as compared to the surplus of 179,000 tonnes same period last year. In 2014, we expect the years of surplus in the zinc market to shrink and turn into deficit on the back of supply shortages and increase in demand growth.

Global mine production is expected to increase by only 1.5 percent in 2013 and 2% by 2014 due to limited new mine additions and major mine depletion taking place by 2015 and 2016. Also, new supply of zinc miners is at an early pre-funding stage and is located in countries with high sovereign risks.Global refined zinc production is expected to have risen by 3.5% and 3.8% in 2014 with China’s production alone rising by 9.5% from last year while the production from Europe, the second largest producer is expected to rise marginally by 1.5% in 2013.

"Zinc is going through a structural shift on the supply side, creating a bullish outlook for zinc prices. During the year 2013, the surplus is expected to narrow down due to strong consumption growth and mine closures, and we are of the opinion that the surplus would turn into deficit in the year 2014. The level of underlying demand for zinc, coupled with the fact that new mine supply would not being added, could lead to the emergence of tightness in supply side over the next two years. Demand from the US, Europe and China is expected to drive consumption higher as the US and Europe are recovering and growing and we also expect China to slowly recover from credit crunch and shadow banking concerns after the second half of 2014. Therefore, we are firmly believe that zinc prices are expected to behave positively and we recommend one to buy LME zinc around $1,900 per tonne for the annual target of $2,350 per tonne," Nirmal Bank Commodity Yearbook said.