Commodities | Feb 12 2007
By Greg Peel
The zinc price is down over 20% in 2007 and some 34% below the November high. Notwithstanding the investment fund scare earlier in the month, zinc has drifted lower since the beginning of the year as a result of a build up of stocks at the London Metals Exchange.
Zinc had been up 126% in 2006, so such a pullback is not unwarranted. But UBS points out that the stock build-up was really just an anomaly.
While it’s hard to find an arbitrage in exchange-traded zinc across the globe, physical prices at delivery can vary geographically depending on demand/supply imbalances and lags. Such it was that in late 2006, zinc was fetching about US$500/t more (February average about US$3,700/t) outside of China than domestically, and as such there was a noticeable increase in Chinese exports. Part of this ended up as LME stock in Singapore.
That differential has now normalised, notes UBS, which means fears of a zinc surplus were short-lived and a return to a shortage is the likely outcome. Chinese exports will reduce. UBS analysts are forecasting a 2007 average zinc price of US$1.85/lb over the current spot price of US$1.41/lb. They believe zinc fundamentals remain strong, and a price rebound is on the cards for the first half of 2007.
Citigroup echoes these sentiments, the analysts saying “we do not expect China to become a structural net importer of zinc”. Citi’s price forecast for the second half of 2007 is US$2.00/lb.
Credit Suisse agrees, suggesting that while China is the world’s largest producer of zinc, and increased exports will continue to overhang market sentiment in the short term, the view for the rest of the year is a return to deficit.
On the nickel front, analysts at GSJB Were are expecting the deficit to continue into 2008. However, they have also noticed an “innovative” new development.
In response to stratospheric nickel prices, China has begun importing low-grade limonitic clay from the Philippines, which contains about 1.1% nickel. This is then converted at currently idle Chinese steel furnaces into low-grade ferronickel metal, containing about 2-3% nickel. While the low-grade product is not suitable for everyone, production is estimated by GSJBW to have increased from a contained nickel equivalent of 3,000t in 2005 to 29,500t in 2006. There is no shortage of ore, so production is expected to increase.
Despite this development, GSJBW retains nickel as its preferred metal on a 12-month view. The analysts do, however, suggest ferronickel should be watched closely in coming months.
Investors looking for zinc exposure are directed by most brokers towards Zinifex (ZFX). The exceptions are JP Morgan and Merrill Lynch who both see current prices as unsustainable in the longer term. They have been saying this for at least 12 months.
GSJBW suggests nickel investors look at Minara Resources (MRE) and Jubilee Mines (JBM).
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