Zinc: 5-Year LME Warehouse Stocks Level vs. Spot Price Chart

Zinc spot price has dropped very far, very fast this year. Analysts are saying this is due to the rising zinc stock at the warehouse. Well, let’s see here… I overlaid 5 year London Metals Exchange stocks and 5 year spot price (charts picked up from Kitco.com):

5 year chart LME Zinc stock spot price

The price drop is not proportionate with the stocks increase. Logic here tells me that companies will be limiting production due to it not being economical, especially since expenses are increasing everywhere.

Teck Chief Executive Officer Donald Lindsay said in a May 23 interview that falling zinc prices will prompt companies to shut mines, cutting global supplies in 18 months. Production may trail demand in 2010 and 2011, compared with a surplus now.

In addition, there’s a high short interest on zinc right now, so when the warehouse stocks decline and price increases, shorts will have to cover, further boosting the zinc price.

Desjardins have been by far the most optimistic about zinc. Here’s a couple of pages from their Commodities Outlook report from Feb 2008.

Below is their May 2008 re-iteration that they expect a balanced zinc market. In May China was still a net importer of zinc, defying everyone’s predictions.

Financial Post
http://www.financialpost.com/trading_desk/mining/story.html?id=540073
Published: Monday, May 26, 2008

BALANCED COPPER, ZINC MARKETS GOOD NEWS FOR TECK

The latest zinc trade data out of China came as a positive surprise to the market and should bode well for a balanced zinc market this year and next, according to Desjardins analyst John Hughes.

On Thursday, the Chinese government said the country imported net refined zinc of 4,672 tonnes in April, compared with net exports of 119,218 tonnes in the same period in 2007. Net imports from January to April now stand at 4,334 tonnes versus net exports of 119,218 tonnes during the first four months of 2007.

“We view this as very positive — recall that the market was expecting China to be a net exporter of zinc metal at an average monthly rate of 12,000 to 17,000 tonnes at the beginning of the year,” Mr. Hughes said in a note to clients.

Going forward, the analyst said the country will record net imports of about 5,000 tonnes in May, 2008, and be a net exporter by 50,000 tonnes in 2008. In 2007, China exported net 126,159 tonnes of zinc.

Mr. Hughes told clients the data supports his forecast of a balanced zinc market in 2008 and 2009, and based on the expectation for inventory levels to remain at current lows, he estimates average zinc prices of US$1.25 per pound in 2008 and US$1.50 per pound in 2009.

The Desjardins analyst also foresees a balanced world copper market in 2008 and 2009 after China also reported strong data for refined copper, with net imports at 109 kilo-metric tonnes during the month. For the year so far, net imports equal 486 KMT for a annualized rate of 1,467 KMT versus Mr. Hughes’ estimate of 1,200 KMT.

David Pett – More info: fptradingdesk.com/mining

And in case you didn’t know…

The major uses of zinc are:

  • anti-corrosion coatings on steel (galvanizing)
  • precision components (die casting)
  • construction material
  • brass
  • pharmaceuticals and cosmetics
  • micronutrient for humans, animals and plants

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