More weakness expected in Zinc price - VM/Fortis

The VM Group says the supply-demand fundamentals for zinc are deeply unattractive as demand from the motorcar industry is decelerating fast. It expects more announcements of zinc project suspensions towards the end of the year.

JOHANNESBURG - 

The supply-demand fundamentals of zinc are deeply unattractive as rising new mine supply is colliding with fast decelerating demand from one of zinc's most important industrial uses - rust-proofing steel bodies for cars.

The Fortis Metals Monthly, produced by the VM Group - says the global surplus in refined zinc during the first five months of 2008 was 59,000t according to International Lead and Zinc Study Group's (ILZSG) estimates and this was bound to more than double by the end of the year.

"The ‘bloodshed' in the global motorcar industry may well get much worse before picking up sometime in 2009. This could not come at worse time for zinc," said the VM Group in the report.

The Group said that given the gloomly macroeconomic outlook for industrialised economies, it expected the zinc surplus for 2009 to be unlimited. However, it noted that the ILZSG only estimated a zinc surplus of 31,000t for this year.

Zinc miners have started to suspend plans for expansions and new projects and the VM Group expected further announcements of this sort to be made towards the end of the year. Some zinc miners will do their best to stay in business, hoping they will be among the companies that survive the price slump.

"The collapse in zinc prices is belated but justified; miners are still ramping up production while we are probably still $200/t away from a rash of suspended output," said the report.

The VM Group indicated the fundamentals for zinc contrasted with supply-demand fundamentals for copper, aluminium, tin and in the longer-term nickel, which all remained "promising".

More weakness is expected in the zinc price that has already lost more than 30% on the LME. The weakness will continue at least until there is clear evidence that the growing global surplus of refined metal and zinc concentrates is peaking.

The fact that China's abolition of export tax rebates on high-grade zinc made little or no impact on the market is an indication of how far matters have deteriorated for zinc, said the report.

"LME warehouse stocks are on a rising trend and are now at the highest since autumn of 2006," said the VM Group.

The Group estimates that the short-term, three month lead price will be $1600/t-$1850/t. It expects zinc to range between $1,500-$1,850/t.

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