Zinc

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Zinc finally shakes off the bears and powers higher
Metals Insider - 08 May 2007

MI WEEK IN REVIEW: It’s been a long time coming but LME zinc prices last week finally escaped the clutches of the technical bears and powered higher amid renewed focus on the market’s fundamental dynamics and a month-start wave of fresh investment money that rolled through the whole LME metals complex.

Fundamental Stimulus
As we said in this column last week, zinc seemed ready to emerge from its winter hibernation and rejoin the bull party. It just needed the right trigger to break the bearish grip of the technical funds and the producer sellers that had capped the market around the $3,700 level, basis 3-month metal.

In the event it got a double fundamental incentive to move higher. When London traders sat down to their desks last Monday, they did so to breaking news of a national mining strike in Peru and a court set-back for Xstrata’s plans to convert its McArthur River mine from underground to open-pit.

In truth, neither was quite the be-all-and-end-all claimed by some of the market bulls. The court ruling on McArthur River did not concern itself with the project’s much-publicised environmental credentials but rather pinpointed a lack of due process on the part of the state government of Australia’s Northern Territory. The government duly rushed off to pass an emergency amendment to its legislation and by the end of the week Xstrata had resumed its conversion work, without which the mine would close.

Nor did the Peruvian strike ever seem likely to exert a long-lasting impact on zinc’s fundamental dynamics. True, the country is a major producer of concentrates and true, some of its zinc mines were affected, but the strike only attracted limited support. The organisers claimed that around 27,000 of a total 120,000 participated. The Ministry of Labour put the figure at just 5% of the national’s mining workforce. Nor was anyone under any illusion that the government would allow it to become a drawn-out affair. It negotiated with the strike leaders even while threatening to declare the action illegal, which would have forced a mass return to work. In the event a deal was reached by Friday.

However, the constant media updates on both stories throughout the week did the bulls’ cause no harm at all and they did cause a refocus of attention on developments in zinc’s raw materials markets.

While there is a consensus that a wave of new and re-opened mined capacity is going to hit the zinc market with cumulative force over the next two years, it is also clear that the concentrates market is not yet generating a surplus that could withstand the shock of a major mine closure, which was the threat at McArthur River.

As always with new projects, several have temporarily run aground or are running late. Australia’s Herald admitted last week that it is still missing a key permit to start major activities at its Dairi project in Indonesia. Aur Resources’ Duck Pond mine in Canada has fared better, achieving commercial production status in March, but note it was originally expected to have come into production by the end of last year.

In the mix is recent scuttlebutt on the London “street” that some smelters are still struggling to source sufficient concentrates.

There was also a “hidden” supply disruption last week in the form of a strike at US producer Horsehead’s Palmerton zinc refinery in the US. So far this has not made it beyond the local press, which means it has barely featured on the market’s radar.

Bear Retreat
But the liberal sprinkling of supply-side news was the stimulus needed for zinc to make a clear upside break through a band of resistance in the $3,700-3,900 area.

The fuse burned slow at first, LME 3-month making solid but unspectacular progress in the first part of the week with volumes dented by May Day holidays in many parts of the world. It rose by $81 to $3,756 at Monday’s close and then by another $104 to $3,860 at Tuesday’s close. Amid general lethargy, it did little more than hold station over Wednesday, edging up a marginal $5 to $3,865 at that day’s close.

But that steady progress forced out the last of the technical fund bears. Our sources estimate the CTA systematic community, who went collectively short in early January, finally returned to neutral over the first half of the week. At the same time the London “street” chatter turned from pending producer sales to pending producer hedge buy-backs.

With pressure from both key bearish influences receding, the market was perfectly balanced for the late Thursday and Friday wave of what looked like fresh index fund money hitting several of the LME metals.

Several of the big bank players have been recommending zinc to their clients for some time—based on its relative under-performance to other LME metals and the impact on stocks both of seasonally strong demand in the second quarter and signs that the flood of Chinese exports looks as if it might be abating.

But we suspect the renewed enthusiasm for the industrial metals complex last week also owed something to shifting sentiment about the state of the US economic nation. After the gloom generated by the previous Friday’s first-quarter growth estimate, the news coming out of the US got steadily better as last week progressed. From a metals perspective, the highlight came in the form of a much better-than-expected reading from the monthly survey of the manufacturing sector by the Institute for Supply Management. The headline index jump to 54.7 in April from 50.9 in March saw a collective reappraisal of the outlook for the country’s factories with the ripple effects evident across the whole financial markets spectrum.

That renewed investment fund flow came just as the last technical bears and producers were disappearing into the undergrowth and it helped zinc power up and through the big-number $4,000 level for an end-of-week close at $4,170—a remarkable week-to-week gain of $495, or 13.5%. By the end of the week the “black-box” CTAs were buying into price strength and were once again collectively long to around 20% of historic capacity.

Unsurprisingly, particularly in light of steadily-falling LME warehouse stocks, the jump higher in outright prices was accompanied by a vicious tightening of the market’s nearby structure. The full cash-to-3-months period ended Friday valued at $18 backwardation, compared with $12 contango the previous Friday.

The bears have taken a battering and the bulls are in full voice again—there’s even talk of zinc exceeding last year’s highs up at $4,600. This market has truly woken up!

Online source:
http://www.metalsinsider.com/WIR/20070508zn.html