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Zinc bull story to keep rolling Base metal is full of surprises (and not always good).
Kip Keen | 22 April 2015 11:03

Zinc has started to show signs of life again.

In recent weeks the spot price of zinc crossed over $1/lb, up from a one-year low around 0.90/lb.

It seems the prospect of a growing zinc deficit is back in play.

The notion of zinc deficit, long forecast by analysts and base metal miners, has already created one false dawn.

With such a deficit in mind, zinc fever caught the market in late 2013 and persisted to mid 2014, driving the price from near $0.80/lb to around C$1.10.

LME zinc stocks had peaked after all and begun to fall.

Yet eventually so did the price of zinc.

The market realised it may have gushed and rushed on zinc a little early. There was the fact that the stocks were really quite high to begin with, so they would take time to shrink.

Indeed they’re still shrinking and are about half the early 2013 peak.

So zinc came back down to earth, plumbing $0.90 this year.

Now, the question is, with zinc surging again is this time any different?

Zinc bulls will point to the fact that LME stocks have halved over the course of two years.

Yet, as Reuters columnist Andy Home recently noted, it seems at least some of that falling stock may be a distortion. He wonders if stocks might be hiding away, rather than feeding demand (zinc = galvanising).

Bulls will also point to closing mines. Indeed, this year there will be important closures. Chief among them are Vedanta’s Lisheen mine in Ireland and MMG’s Century mine in Australia.

Yet alongside this narrative of closures, are mine expansions. Indeed, big ones. This year. You hear less about these.

For example: Glencore is ramping up Lady Loretta and Mt Isa and expects to produce 200,000 tonnes more zinc this year than last (zinc outlook page 136 of Glencore presentation). That’s a little more than Lisheen recently produced it’s worth remembering.

Expansions such as these have tempered some analyst expectations for zinc. As BMO’s Jessica Fung (neutral zinc) put it in an email earlier this year, “For me this pushes out the bull story to at least 2016 if not later”.

A point Fung and others raise also raise: very strong zinc-mine growth in China. Unlike metals like copper, or gold for that matter, China has a substantial zinc mining sector (in all China accounts for more than a third of total world refined zinc supply.) In recent years its domestics supply has grown rapidly in response to demand.

How China mine supply fares this year is a wild card. In part this is the case as the government reportedly continues to crack down on smaller scale mines that pollute.

This isn’t to say zinc doesn’t have decent prospects. Chinese and US auto demand has been pretty strong this year. Good for zinc demand so far.

And known long-term mine supply of zinc is hardly robust.

There’s something to the tale of impending zinc deficit.

But it may not, at least not this year, underpin – or at least fundamentally justify – a run-up in the price of zinc.

Of course that could just happen again anyway.