Zinc's rally has forecasters reworking models
24 March 2006
Zinc's rally has forecasters reworking models
Source: Dow Jones
Zinc's rally to all-time highs this week, bringing year-to-date gains to 30% as investors hone in on shrinking warehouse stocks, is expected to result in a slew of price upgrades from forecasters.
The galvanizing metal traded up to $2,582.50 a metric ton on the London Metal Exchange Thursday, the latest in a series of all time highs as strong China-led demand combines with tight mine supply to shrink warehouse inventories.
At 0546 GMT Thursday the metal had slipped back slightly to $2,565 as Asian players stayed on the sidelines awaiting further price direction from London.
The metal's dizzying 18% gains since March 8 have taken share prices of producers along for the ride with world number two Zinifex Ltd. hitting a record high in early trading Friday and Perth-based Kagara Zinc Ltd up 11% on the day.
The gains have some market forecasters reworking their 2006 price projections.
David Thurtell, commodity strategist for Commonwealth Bank of Australia, said Friday he'll be revising a previously expected $2,400 average to around $2,650 as LME stocks fall below the important 300,000-ton mark.
At the same time India's Hindustan Zinc Ltd. has raised its zinc prices by INR3,000 to INR130,100 a metric ton effective Friday "in line with the rising international prices," a company spokesperson said.
"The supply demand balance is in chronic shortfall," Thurtell said. "Some people say the funds don't look at the fundamentals and are just trying to drive it, but they don't drive price direction, they just add some heat to it."
The supply-demand outlook means prices could rise another 10%-15%, especially if disruptions such as current cyclone-related plant closures in Australia continue to spur sentiment, Thurtell said.
Profit taking may precede further gains
National Australia Bank minerals and energy economist Gerard Burg said he too is likely to upgrade his 2006 average forecast of $2,336/ton, warning however that some profit taking may precede further gains.
"We see prices continuing to rise during the year but the real question is whether we have pushed up a bit too high with speculative interests," Burg said. "I wouldn't be surprised if it came off a little."
"Having said that, the big driver continues to be declining stocks so there is a strong fundamental element to the increases all the same," he said.
Burg added a market deficit beyond half a million tons this year would be seen as a buying opportunity in futures markets.
The metal's chart patterns, closely tracked by many investors, are also supportive of more gains, said analysts.
Dow Jones technical analyst Dave Rogers said zinc appears to be targeting the Fibonacci expansion point of $2,785 in the next few months, while $2,165 offers strong underlying support.
Further driving investor sentiment are occasional "wild cards" such as the Northern Territory government's environmental concerns over Xstrata Plc's application to switch to an open-cut operation at its McArthur River mine.
Xstrata has said it will shut the mine if the application is rejected, thereby stripping up to 3% of global supply from 2008.
High prices may drive consumers away
Not everyone is so sure, however, with ABN Amro coming out this week with a 2006 average forecast of $1.05 a pound or around $2,300 a ton.
Besides the argument that fund interests are overshooting fundamental indicators in the base metal complex generally, ABN Amro said record prices pause risks to zinc's market share as consumers seek cheaper alternatives.
In addition, high prices and shrinking stocks mean producers are likely to give serious thought to expanding production, said ABN Amro commodities analyst Warren Edney.
Countering that, however, are long lead times and cost constraints, meaning new project development opportunities in the next couple of years are scarce.
"Even if someone made a decision today, you're talking at least three years to get something into production, particularly as most of these zinc deposits are in unstable political environments or difficult-to-get-to places," Kagara chairman Kim Robinson said in an interview this week.
"I'd expect prices to keep going up."
