Another bullish article I missed from last Thursday:
Why Zinc Doesn't Stink
By Eric Fry
Zinc Granules
Zinc doesn't usually grab a lot of headlines, but it might start grabbing a few in 2017.
Most of the time, precious metals like gold and silver capture the attention of investors while base metals like zinc hide in the shadows. But this gritty, essential metal might be stepping into the spotlight very soon.
Already this year, the price of zinc has bounced sharply from the six-year low it hit last January. And the CEO of one of the world's largest zinc miners believes the metal's price is on the verge of a much bigger move.
In a November 10 interview with Bloomberg TV, Don Lindsay, the CEO of Canada's Teck Resources Ltd. (NYSE: TCK), declared...
We actually think the most exciting commodity is zinc because it has already gone through its bottoming process and is in a distinct [supply] deficit... [So] we think zinc is just on the verge of [a] big move.
Lending support to Lindsay's optimistic outlook is the fact that the mine supply of zinc is trailing behind demand. And this "supply deficit" is likely to persist for several more years.
Let's take a closer look at the demand side of this relationship...
In day to day life, most of us are oblivious to zinc. Perhaps that's because we don't wear zinc wedding rings... or zinc belly button piercings. But zinc is an omnipresent metal.
You can't get away from the stuff. In fact, it is the world's fourth most used metal behind iron, aluminum and copper.
Zinc combines with various metals to make a wide variety of alloys like, for example, the alloy we call a "copper penny." Only 2.5% of the metal content of a U.S. penny is actually copper. The other 97.5% is zinc.
Zinc also combines with copper to make brass. But zinc's primary industrial use is to galvanize steel. Because of this connection with steel, zinc demand tracks very closely with global economic growth, especially the construction-intensive economic growth that occurs in China.
At present, the global economy is humming along nicely. And despite the recent slowdown in China, that country's zinc demand remains robust. As a result, global zinc demand has grown nearly 14% during the last four years. Meanwhile, the mine supply of zinc has fallen, causing a supply deficit.
Despite this recent deficit, the zinc price did not move higher. That's because above-ground supplies of the metal, like those at the London Metals Exchange, were sufficient to fill the deficit. But as the chart below shows, the LME's zinc inventories have been falling sharply.
Zinc Price And Supply
Obviously, above-ground stockpiles of zinc cannot fill the supply deficit indefinitely. In fact, Lindsay believes the falling LME inventories, combined with falling mine production of zinc, will create a "pinch point sometime between now and six months from now." At that point, he says, "We'll see quite a move."
History is on his side. When LME inventories dropped sharply between 2004 and 2006, the zinc price soared.
Then, like moths to a flame, the zinc miners ramped up production to profit from the metal's high price. As production increased and supplies of the metal flooded into LME warehouses, the zinc deficit became a glut, causing the price to fall once again.
But a new bull market is underway... and it appears to have legs.
Teck expects zinc demand to surge about 20% over the next four years. At the same time, the company anticipates very little growth in the global mine supply.
The result? A widening supply deficit.
At an investor conference earlier this year, Teck presented a version of the chart below, which forecasts a widening supply deficit through 2020.
Forecast for Zinc
If deficits like these come to pass, the zinc price could easily overtake its 2006 high of $2.11 per pound. That would be a gain of 73% from the current quote of $1.22 per pound.
Obviously, zinc miners like Teck would benefit immensely. According to Lindsay, every $0.01 rise in the price of zinc boosts Teck's EBITDA by about 1%, all else being equal.
A 1% impact may not seem like much... until you start imagining a scenario like this one.
If the zinc price were to climb back to its 2011 high, Teck's EBITDA would nearly double... all else being equal.
All else is never equal, of course. But if zinc is on the verge of a "major move," companies like Teck will certainly benefit.
Keep your eyes on zinc. It may soon begin shining more brightly than gold or silver.
Cheers,
Eric J. Fry
For The Non-Dollar Report
