LME Zinc Prices Jump to Almost 90¢/lb29 Sep 2010 • by Natalie Aster
Zinc demand is falling by 5% worldwide, the base metal is in surplus and most forecasters see the 2009 annual average zinc price well below the 85?/lb average of 2008. Yet, the metal is trading these days at close to 90? because speculators believe China will be shutting smelters soon as part of the pollution-control efforts caused by the lead poisoning outbreak in Shaanxi province.
Bob Garino, director of commodities for the Institute of Scrap Recycling Industries and Purchasing.com blogger, says "investor interest, not supply/demand fundamentals, have been the principal driver behind slab zinc prices" since London metal Exchange (LME) monthly prices jumped 78% from 50? last December to 89? this week.
Analyst Jim Lennon at Macquarie Research agrees, noting that weak purchasing by the industrialized nations--primarily members of the Organization for Economic Cooperation and Development--continue to outweigh strong emerging market demand. Garino also notes that LME zinc inventories have increased more than 70% in the past eight months to more than 436,000 metric tons this week.
Looking ahead, Garino writes that "zinc's fortunes will depend in large measure on the strength of coated steel products, especially Chinese consumption patterns." The key is whether China will maintain this year's 15% growth rate in zinc purchasing in 2010. Lennon points out that the recovery in 2009 prices has been "due to the remarkable recovery in Chinese demand during the first half of 2009 following the massive stimulus program enacted in China in late 2008 and also due to a major restocking of commodities."
Lennon expects a meaningful increase in global zinc demand in 2010 "as OECD economies continue to recover amid robust emerging market growth," although he admits "continued deterioration of the U.S. commercial real estate market poses downside risk to this forecast."
Some analysts already are forecasting 95? zinc in 2010 and futures trading in London has December, 2010, zinc as high as 91?. However, other analysts are tempering their price outlooks because of as much as 300,000 metric tons in zinc smelting capacity growth next year. China has one of the largest zinc ore reserves in the world and has been expanding, rather than reducing, zinc smelting operations.
That's why Lennon suggests the global zinc market will remain in surplus in 2010 instead of a deficit, even if demand in China continues its double-digit growth rate. "As a result, we are lowering our zinc price targets," he says. However, he does acknowledge "the latest developments in China concerning the shutdown of lead smelters that do not meet safety and environmental standards pose downside risk to our zinc supply forecast and upside risk to our price forecasts."
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