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ZINC BEAR MARKET ENDING
Zinc Bear Market Seen Ending as Chinese Steel Gobbles Up Glut: Commodities
By Jae Hur and Sungwoo Park - Oct 12, 2011
The 28 percent plunge in zinc that drove the metal into a bear market may be ending as record demand from steelmakers erodes stockpiles and the price slump spurs producers to curb output.
About 50 percent of zinc is used to rust-proof steel and production of the alloy reached an all-time high of 31.7 million metric tons in the second quarter, according to Macquarie Group Ltd. Global stockpiles monitored by exchanges in London and Shanghai are the lowest since April. Prices may climb as much as 25 percent to $2,450 a ton next year, according to the median in a Bloomberg survey of 10 producers, analysts and traders.
Prices plunged 57 percent since reaching a record $4,580 in 2006 as increased production created a five-year glut. The surplus is narrowing as consumption expands to a record, and will shrink next year to its smallest since 2007, according to Morgan Stanley. China expanding at more than twice the speed of the global economy and using more steel than ever may mean shortages as early as 2014, the bank estimates.
“I’m bullish with regards to zinc over the next two to three years and even longer,” said Gavin Wendt, the founder and senior resource analyst at Sydney-based Mine Life Pty., who has followed the mining industry for two decades. “Given the level of underlying demand for zinc and at the same time the fact that new reserves are not being added, there is going to be a supply side problem to emerge over the next few years.”
Price Drop
Zinc declined in three of the past four years on the London Metal Exchange, the worst performance of any of the six main industrial metals. Benchmark three-month futures slumped to $1,820 from $2,539.50 since July on speculation that slowing global growth will sap demand. The metal traded unchanged at $1,945 a ton at 10:49 a.m. in Tokyo today. The Standard & Poor’s GSCI gauge of 24 raw materials entered a bear market last month after retreating more than 20 percent since April.
More than $10 trillion has been wiped off the value of global equities since May as the MSCI All-Country World Index of equities retreated about 18 percent, data compiled by Bloomberg show. Treasuries maturing in 10 years or more returned 24 percent this year, according to data compiled by Bloomberg and the European Federation of Financial Analyst Societies.
This year’s anticipated production surplus of 270,000 tons will drop to 130,000 in 2012, Morgan Stanley estimates. Demand will advance 2.6 percent to a record 13.3 million tons in 2011 as supply increases 1.5 percent to 13.43 million tons, the bank forecasts. That supply is valued at about $31 billion, based on this year’s average price.
Below Cost
Production may lag behind estimates because prices are below extraction costs at some mines, according to Macquarie. Mines in China, accounting for about 29 percent of global supply, need as much as $2,200 a ton to break even, the bank estimates. The nation’s zinc-ore imports rose to the highest in almost a year in August, customs data show.
Growth in demand may be curbed as economies slow. The International Monetary Fund lowered its global growth forecasts to 4 percent for this year and next on Sept. 20, from earlier estimates of 4.3 percent for 2011 and 4.5 percent in 2012.
Demand contracted 5.2 percent in 2009 as the global economy contended with its worst recession since World War II, Morgan Stanley estimates. Crude-steel consumption fell 1.5 percent in 2008 and 6 percent in 2009, the bank estimates.
‘Confidence Weak’
“With market confidence getting weaker about the prospects for global growth, zinc prices will face pressure from oversupply,” said Tetsu Emori, the chief fund manager at Astmax Co. in Tokyo who helps manage $400 million in assets.
While stockpiles have dropped about 7 percent since reaching an all-time high of almost 1.3 million tons in July, they are still more than double the four-year average. The 1.2 million tons of inventories reported by the LME and Shanghai Futures Exchange are equal to more than a year of demand from the U.S. Orders to withdraw metal from warehouses monitored by the LME more than doubled since the start of the year.
Higher prices would boost earnings for Zug, Switzerland- based Xstrata Plc (XTA) and Vancouver-based Teck Resources Ltd. (TCK), the world’s biggest producers. The metal accounted for 10 percent of Teck Resources’ sales last year, while Xstrata’s lead and zinc mining brought in 13 percent of the company’s revenue, data compiled by Bloomberg show.
Steel Production
World steel production may rise 7 percent to 1.6 billion tons next year, according to the Australian Bureau of Agricultural and Resource Economics and Sciences, the state forecaster. Steel consumption in China will advance 6 percent to 664 million tons in 2012, the bureau estimates. Australia is the largest producer of iron ore, the main ingredient in steel.
China’s zinc demand may reach 6.58 million tons in 2015, compared with 4.75 million in 2010, according to Beijing Antaike Information Development Co., a state-backed research group, and Raw Materials Group, a Solna, Sweden-based company that has compiled commodities data for more than two decades. Zinc is also combined with copper to make brass and alloyed with other metals for electrical components.
Imports of refined zinc by China rebounded 64 percent to 26,685 tons in August after tumbling 57 percent from a 20-month peak reached in March, customs data show. Domestic production of zinc ore and concentrates, an intermediate product, fell 8.8 percent to 358,734 tons in July, according to the Ware, England- based World Bureau of Metal Statistics.
“Of all the base metals, we still very much like zinc,” Tony Hall, the chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets, told Bloomberg Television’s “On the Move.” “We make sure that we are accumulating and not cutting our positions.”
To contact the reporters on this story: Jae Hur in Singapore at jhur1@bloomberg.net; Sungwoo Park in Seoul at spark47@bloomberg.net
To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net
By Jae Hur and Sungwoo Park - Oct 12, 2011
The 28 percent plunge in zinc that drove the metal into a bear market may be ending as record demand from steelmakers erodes stockpiles and the price slump spurs producers to curb output.
About 50 percent of zinc is used to rust-proof steel and production of the alloy reached an all-time high of 31.7 million metric tons in the second quarter, according to Macquarie Group Ltd. Global stockpiles monitored by exchanges in London and Shanghai are the lowest since April. Prices may climb as much as 25 percent to $2,450 a ton next year, according to the median in a Bloomberg survey of 10 producers, analysts and traders.
Prices plunged 57 percent since reaching a record $4,580 in 2006 as increased production created a five-year glut. The surplus is narrowing as consumption expands to a record, and will shrink next year to its smallest since 2007, according to Morgan Stanley. China expanding at more than twice the speed of the global economy and using more steel than ever may mean shortages as early as 2014, the bank estimates.
“I’m bullish with regards to zinc over the next two to three years and even longer,” said Gavin Wendt, the founder and senior resource analyst at Sydney-based Mine Life Pty., who has followed the mining industry for two decades. “Given the level of underlying demand for zinc and at the same time the fact that new reserves are not being added, there is going to be a supply side problem to emerge over the next few years.”
Price Drop
Zinc declined in three of the past four years on the London Metal Exchange, the worst performance of any of the six main industrial metals. Benchmark three-month futures slumped to $1,820 from $2,539.50 since July on speculation that slowing global growth will sap demand. The metal traded unchanged at $1,945 a ton at 10:49 a.m. in Tokyo today. The Standard & Poor’s GSCI gauge of 24 raw materials entered a bear market last month after retreating more than 20 percent since April.
More than $10 trillion has been wiped off the value of global equities since May as the MSCI All-Country World Index of equities retreated about 18 percent, data compiled by Bloomberg show. Treasuries maturing in 10 years or more returned 24 percent this year, according to data compiled by Bloomberg and the European Federation of Financial Analyst Societies.
This year’s anticipated production surplus of 270,000 tons will drop to 130,000 in 2012, Morgan Stanley estimates. Demand will advance 2.6 percent to a record 13.3 million tons in 2011 as supply increases 1.5 percent to 13.43 million tons, the bank forecasts. That supply is valued at about $31 billion, based on this year’s average price.
Below Cost
Production may lag behind estimates because prices are below extraction costs at some mines, according to Macquarie. Mines in China, accounting for about 29 percent of global supply, need as much as $2,200 a ton to break even, the bank estimates. The nation’s zinc-ore imports rose to the highest in almost a year in August, customs data show.
Growth in demand may be curbed as economies slow. The International Monetary Fund lowered its global growth forecasts to 4 percent for this year and next on Sept. 20, from earlier estimates of 4.3 percent for 2011 and 4.5 percent in 2012.
Demand contracted 5.2 percent in 2009 as the global economy contended with its worst recession since World War II, Morgan Stanley estimates. Crude-steel consumption fell 1.5 percent in 2008 and 6 percent in 2009, the bank estimates.
‘Confidence Weak’
“With market confidence getting weaker about the prospects for global growth, zinc prices will face pressure from oversupply,” said Tetsu Emori, the chief fund manager at Astmax Co. in Tokyo who helps manage $400 million in assets.
While stockpiles have dropped about 7 percent since reaching an all-time high of almost 1.3 million tons in July, they are still more than double the four-year average. The 1.2 million tons of inventories reported by the LME and Shanghai Futures Exchange are equal to more than a year of demand from the U.S. Orders to withdraw metal from warehouses monitored by the LME more than doubled since the start of the year.
Higher prices would boost earnings for Zug, Switzerland- based Xstrata Plc (XTA) and Vancouver-based Teck Resources Ltd. (TCK), the world’s biggest producers. The metal accounted for 10 percent of Teck Resources’ sales last year, while Xstrata’s lead and zinc mining brought in 13 percent of the company’s revenue, data compiled by Bloomberg show.
Steel Production
World steel production may rise 7 percent to 1.6 billion tons next year, according to the Australian Bureau of Agricultural and Resource Economics and Sciences, the state forecaster. Steel consumption in China will advance 6 percent to 664 million tons in 2012, the bureau estimates. Australia is the largest producer of iron ore, the main ingredient in steel.
China’s zinc demand may reach 6.58 million tons in 2015, compared with 4.75 million in 2010, according to Beijing Antaike Information Development Co., a state-backed research group, and Raw Materials Group, a Solna, Sweden-based company that has compiled commodities data for more than two decades. Zinc is also combined with copper to make brass and alloyed with other metals for electrical components.
Imports of refined zinc by China rebounded 64 percent to 26,685 tons in August after tumbling 57 percent from a 20-month peak reached in March, customs data show. Domestic production of zinc ore and concentrates, an intermediate product, fell 8.8 percent to 358,734 tons in July, according to the Ware, England- based World Bureau of Metal Statistics.
“Of all the base metals, we still very much like zinc,” Tony Hall, the chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets, told Bloomberg Television’s “On the Move.” “We make sure that we are accumulating and not cutting our positions.”
To contact the reporters on this story: Jae Hur in Singapore at jhur1@bloomberg.net; Sungwoo Park in Seoul at spark47@bloomberg.net
To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net
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