Mine closures – a boon for zinc

Zinc prices seen rising as some of the mines run dry amidst spurt in demand

Zinc is used principally for galvanising iron and more than 50 per cent of metallic zinc goes into galvanising steel.

Zinc is the primary metal used in making American pennies and rising prices of this bluish-white metal this year have forced the US Mint to reduce manufacturing costs to offset higher prices.

Zinc prices have soared to three-year highs in 2014 on intensifying deficit in the global market as one of the biggest mines, Century open pit in Australia, is due for closure next year and the delayed start of its Dugald River project. MMG’s Century mine is expected to run dry in 2015, removing about 5 per cent of global supply.

Several large, aging mines are also scheduled to close next year as miners need higher prices to justify the cost of finding and developing new sources of metal. Miners may not produce enough zinc to meet the needs of steel companies and coin-makers until 2018. Owing to this, zinc production is expected to fall short of demand this year for the first time since 2007.

According to the Lisbon-based International Lead and Zinc Study Group, zinc demand is up 7.7 per cent globally in the first six months of this year to 6.8 million tonnes. As a result, users are drawing on stockpiles of the metal to make up for production shortfalls.

Supplies of the metal in LME-licensed warehouses fell to a three-and-a half- year-low in July, and are down 15 per cent this year. The warehouses contain enough zinc to meet 19 days of demand, down from 24 days at the start of the year.

Chinese factor

Moreover, China’s MMG Ltd, owner of the world’s third-biggest zinc mine, said the global deficit in the metal had increased faster than expected, spurred partly by demand growth in China to rust-proof steel for cars. Chinese demand had picked up as companies sought galvanising technology, following a push by the International Zinc Association to tout the benefits of coating steel with zinc to prevent rust.

As a result of this, Chinese imports of refined zinc have jumped by 39.3 per cent through July, given the solid underlying demand growth, up about 7 per cent in 2014, boosted by strong auto production (+9.4 per cent year to date), rising content of galvanised steel in cars to prevent rust.

After a surplus of six years, supplies of the metal would be in deficit this year, coinciding with world major economies struggling for a breakout from recession, propelled by forecasts of annual demand growth of five-six per cent.

The Zinc study group has estimated that demand for zinc exceeded output by 248,000 tonnes in 2014 through July’14, compared with a 15,000-tonne production surplus in the same period a year earlier.

Prices to rise

Strong demand growth at a time when a number of big mines are approaching the end of their lives will lead to increase in physical deficit and a rundown in stocks at registered LME and Shanghai warehouses, thereby boosting prices further.

For the coming months, prices will continue to surge as some of the world’s largest zinc mines run dry just amidst spurt in demand.

In addition, MMG Ltd, which owns Century, had planned to open a new mine in Australia next year, but it’s being delayed back to late 2016 due to technical issues. This will fuel supply concerns.

However, higher shipments from China, the world's top consumer and producer of refined zinc, in the fourth quarter as tight credit crimps domestic demand at a time of increased imports to LME warehouses in Asia could cap LME zinc prices, which gained around eight per cent this year.

LME Zinc (CMP: $2,222) prices can head higher towards $2,500/tonne, while zinc on the MCX (₹135.5) can head higher towards ₹152/kg.