Commodities | Feb 07 2011
By Chris Shaw
Of all the base metals, zinc was the only one to close 2010 at a lower level than it opened the year. In the view of Barclays Capital this underperformance was a fair reflection of comparatively weaker fundamentals for the metal.
Deutsche Bank notes there have been no signs of improvement in recent weeks, as over the past three months zinc has underperformed other base metals by 22% for both nickel and copper and by 12% for aluminium.
In part Deutsche suggests this has been a reflection of traders and investors using zinc as a hedge against long positions in other metals. This trade has run its course in the broker's view and Deutsche suggests this trade should be reversed over the near-term as any improvement in zinc's market fundamentals could see the metal re-rate against its peers.
Barclays doesn't expect zinc's fundamentals to improve much through 2011, as LME inventories are rising and SFHE (Shanghai Futures Exchange) inventories are at a record high. On its numbers, Barclays estimates total exchange stocks of zinc have broken through one million tonnes. This is the highest level since 1995.
While current market conditions are not supportive to zinc prices, Barclays points out there is a significant difference between the short and medium-term outlooks for the metal. Mine production in China in particular will be the key, Credit Suisse noting Chinese production of mined zinc accounts for 30% of total world supply.
Barclays expects prices will firm later this year on the back of a continued tightening in concentrate supply. The group is forecasting prices to hit a record annual average price of US$3,300 per tonne in 2013, reflecting a tightening of supply in 2012 in particular as some established mines close and other smaller mines experience lower head grades.
Its forecasts reflect this, Barclays seeing global production of 13.2 million tonnes this year, 13.7 million tonnes in 2012 and 13.9 million tonnes in 2013. On the demand side, Barclays is forecasting global consumption of 12.9 million tonnes this year, 13.7 million tonnes in 2012 and 14.4 million tonnes in 2013.
Goldman Sachs agrees with the view the fundamentals for zinc are improving, though it will be two or three years before the market begins to resemble the fundamentally stronger copper market. According to the broker, zinc may be in balance by 2012 before a meaningful deficit of around 230,000 tonnes takes shape in 2013.
Unreported inventories will need to be reabsorbed before prices climb higher in the view of Goldman Sachs, so its price estimates stand at US101c per pound in 2011, US99c per pound in 2012 and US107c per pound in 2013. In dollars per tonne terms, this implies respective forecasts of US$2,250, $2,204 and US$2,383.
In contrast, Barclays has price forecasts for zinc of US$2,538 per tonne in 2011, US$2,800 in 2012 and US$3,300 in 2013, while Deutsche Bank is forecasting prices of US$2,475 per tonne this year, US$3,125 in 2012 and US$2,800 in 2013.
Citi's forecasts are closer to those of Goldman Sachs, the broker expecting average annual zinc prices of US$2,478 per tonne in 2011, US$2,401 per tonne in 2012 and US$2,276 per tonne in 2013. Overall, Citi is positive on the outlook for commodity prices given loose liquidity conditions, negative real interest rates and signs of improving global manufacturing activity.
Base metals should outperform precious metals in 2011 thanks to strong emerging market demand, supply disruptions and persistent investment fund inflow, but on a six-month view Citi has zinc among its least-favoured exposures given current market fundamentals. The others on the broker's least preferred list are platinum, lead, gold and silver.
Macquarie agrees, expecting it will be zinc along with nickel and steel that underperforms relative to other commodities on a six to 12-month view. Zinc is fairly priced at current levels relative to production costs in Macquarie's view, leading the broker to suggest the metal is likely to range trade around current levels in coming months.
On a two to three-year view Macquarie suggests the outlook for zinc demand and prices is positive given expectations the market tightens over that timeframe. This tightening will reflect the rate of increase in mine supply falling short of rising zinc demand.
Macquarie expects an increase of around 12% in the average zinc price to US110c per pound this year, or around US$2,500 per tonne. Further price increases over the next two years are anticipated, with forecast averages of US$2,650 per tonne in 2012 and US$2,784 per tonne in 2013.
Given its view on prices for the metal in the coming year, Goldman Sachs doesn't recommend direct equity exposure to pure-play zinc stocks on a 12-month view.
Investors seeking zinc exposure can look at the following companies listed on the Australian Stock Exchange: Intec Ltd ((INL)), Prairie Downs Metals ((PDZ)), Abra Mining ((AII)), Kagara ((KZL)), Perilya ((PEM)), Terramin Australia ((TZN)), Meridian Minerals ((MII)), Zinc Co Australia ((ZNC)), TNG Ltd ((TNG)), Overland Resources ((OVR)), Union Resources ((UCL)), Tri Origin Minerals ((TRO)), Metals Australia ((MLS)), Blackthorn Resources ((BTR)), Jabiru Metals ((JML)), Rox Resources ((RXL)), Anglo Australian Resources ((AAR)) and Bass Metals ((BSM)).
Of these companies, the FNArena database shows only Kagara, Perilya and Jabiru Metals are currently receiving coverage, with respective Sentiment Indicator readings of minus 0.5 for Kagara and 1.0 for both Perilya and Jabiru Metals.