Zinc is at a supply-demand tipping point that has miners and investors looking to cash in on an imminent shortage of this essential metal which has been in oversupply for nearly a decade.
“We believe the outlook for zinc is the most favorable of the base metals. With recent and expected closures of a number of zinc mines, we believe that approximately 1.5 million metric tons of current zinc mine production will be closed by the end of 2016 in a 13 million (tpa) market,” Teck Resources Ltd., operator of the Red Dog Mine in Northwest Alaska, reported in its first-quarter 2014 update.
Adam Low, a metals and mining analyst with Raymond James & Associates, Inc. agrees.
“In terms of metals that I think stand a very good chance of doing well this year, I would rank zinc at the top of that list, and it's because of what's going on the supply side of the equation,” the analyst told Wall Street Transcripts during a recent interview.
The 2013 closures of the Brunswick and Perseverance mines in Canada have removed 315,000 metric tons of annual zinc production off the supply side of the scales. These events seem to have tipped the balance enough that consumers are dipping into vast stockpiles that have built up in recent years.
Teck said combined zinc metal inventories at the London Metals Exchange and Shanghai Futures Exchange have fallen by 122,700 metric tons, or 8 percent, so far this year.
Zinc stockpiled at LME warehouses, which peaked above 1.2 million tons at the beginning of 2013, has since steadily declined and now sits at 750,000 tons.
As a result, zinc, which sold for about US82 cents per pound on the LME this time last year, is currently fetching around US95 cents, reflecting more than a 15 percent increase.
Stefan Ioannou, mining analyst at Haywood Securities said this is only the beginning.
“Currently, the zinc price is languishing with the rest of the base metals. However, with zinc, it’s not really a 2014 story. The excitement is looking forward to 2015 and beyond, in the wake of an anticipated supply deficit,” he told The Wall Street Transcript May 1.
The scheduled mid-2015 closure of the Century Mine in Australia will take another 515,000 metric tons of annual zinc production off the supply side of the equation; and the anticipated 2016 shuttering of the Lisheen Mine in Ireland will cut the yearly supplies by another 165,000 metric tons.
On the demand side, Teck said auto production is driving strong zinc demand in the United States, China and Japan.
During an April presentation at the 2014 Nunavut Mining Symposium, Scotiabank Vice President, Economics Patricia Mohr said China’s passenger car and cross-over utility sales jumped by 23.6 percent in 2013, surpassing U.S. sales last year, and should advance by 12.5 percent in 2014.
Increased construction in Europe is also expected to bolster demand of the galvanizing metal.
Scotiabank’s outlook is for zinc prices to average US$95 cents/lb. in 2014 and US$1.25/lb. in 2015.
Mohr predicts zinc prices could climb as high as US$1.50 per pound in 2016-17, significantly higher than the US87-cent-per-pound average selling price for the metal in 2013.
Slightly more bullish, Haywood Securities’ Ioannou sees the essential metal selling for more than US$1.50 per ounce by 2016.
CORRECTION May 27, 2014: The previous version of this article stated that Teck Resources Ltd. is the owner of the Red Dog Mine in Northwest Alaska. Teck Resources is the operator of the mine. NANA Regional Corp., a Native corporation representing the Iñupiat of Northwest Alaska, owns the property on which the Red Dog operation is located. In the second paragraph, this article has been corrected to state that Teck Resources Ltd. is the operator of the Red Dog Mine.