The largest glut of zinc in almost two decades is threatening to curtail a rally in prices as record production expands inventories to the highest since at least 1984.
Supply will outpace demand by 539,000 metric tons, the most since 1993, according to Standard Bank Plc. Stockpiles of the metal used in brass and steel will reach 2.2 million tons, Barclays Capital estimates. Prices will drop 10 percent to $1,832 a ton this year, the median of 15 analyst and trader estimates compiled by Bloomberg shows. That may curb profit for Zug, Switzerland-based Xstrata Plc (XTA), the biggest producer.
Zinc rose 11 percent this year, rebounding from its biggest annual drop since 2008, on signs economic growth is accelerating. The six-member London Metal Exchange Index entered a bull market last month after rallying more than 20 percent from a 15-month low in October. JPMorgan Chase & Co. is warning that some prices rallied too fast and Goldman Sachs Group Inc. withdrew a recommendation to buy zinc on Jan. 26 after prices exceeded its 12-month forecast.
“There are not a lot of reasons why zinc should go higher,” said Bart Melek, the head of commodity strategy at TD Securities Inc. in Toronto and the third most-accurate zinc- price forecaster tracked by Bloomberg Rankings in the past eight quarters. “It’s a surplus, and demand is being outpaced by supply growth. We’re looking for a bit of a correction.”
The metal entered a bull market in January after rising 27 percent from the October low. It fell 3.6 percent last week as orders to withdraw metal from LME-monitored warehouses plunged 41 percent, the most since January 2011. Zinc’s gain this year to $2,042 compares with an 8.5 percent jump in the MSCI All- Country World Index of equities and 5.5 percent advance in the Standard & Poor’s GSCI Spot Index of 24 commodities. Treasuries lost 0.4 percent, a Bank of America Corp. index shows.
Global production will increase 3.7 percent to 13.6 million tons this year, led by a 7 percent gain in China, according to Barclays Capital. The Asian nation will account for 41 percent of supply and 43 percent of consumption. Lower prices may not spur mines to curb output because zinc ores typically yield other metals that can sustain margins, Barclays said.
Standard Bank’s forecast for a surplus would be the biggest in the bank’s data going back to 2000. It would be the most since 1993, International Lead and Zinc Study Group data show.
Xstrata’s Mount Isa mine in Australia extracted 357,000 tons of zinc, 139,000 tons of lead and 204 tons of silver last year, the company said in a report to investors Feb. 7. Its Brunswick zinc mine in Canada also produces copper. Silver and copper traded at record annual averages in 2011 and rose at least 11 percent this year. About 90 percent of the world’s zinc mines are profitable at about $1,490 a ton or more, or 27 percent below today’s price, according to Barclays.
Xstrata, which got a $37.6 billion takeover offer from Glencore International Plc (GLEN) this month, will report record net income of $5.88 billion in 2012, according to the mean of 14 analyst estimates compiled by Bloomberg. Its shares fell 21 percent in the past 12 months. Zinc and lead accounted for 11 percent of sales in 2011 and a $22-a-ton change in the price of zinc translates into a $20 million move in its operating profit, data compiled by Bloomberg show.
Traders may still be adding to bets on higher prices. Open interest, or contracts outstanding, in LME zinc futures climbed 7.3 percent this year, bourse data show. Rising open interest at a time when prices are rallying suggests new so-called long positions, according to Macquarie Group Ltd.
Investors may already be anticipating an end to the glut, which Barclays says may come in 2014. Morgan Stanley is predicting a 110,000-ton shortage next year, snapping six consecutive annual surpluses. Prices more than doubled in 2009 even as supply outpaced demand.
Consumption may also exceed estimates as governments and central banks move to shore up growth. The Federal Reserve pledged last month to keep interest rates near zero until late 2014 and Chairman Ben S. Bernanke said he’s considering additional bond purchases to boost the economy. The Bank of England said on Feb. 9 it would add another 50 billion pounds ($79 billion) to the target for bond purchases.
“Prices will probably get a bit of support later in the year because 2013 does look as though the market will begin to start tightening up,” said Gayle Berry, an analyst at Barclays in London. “People will try to position themselves ahead of that.”
There are few signs that consumption is accelerating right now. Stockpiles in LME-monitored warehouses rose 20 percent in the past 12 months and at 848,050 tons are about 75 percent higher than the average over the past decade. Canceled warrants, or orders to withdraw metal from inventories, declined in 14 of the past 15 weeks, LME data show.
Global output of galvanized sheet steel, which is rust- proofed with zinc, fell 11 percent in the fourth quarter, according to Macquarie. Galvanizing accounts for 57 percent of zinc demand, Royal Bank of Scotland Group estimates. Growth in property investment spending in China should slow to about 15 percent this year, from 23 percent in 2011, curbing consumption of steel used in construction, Barclays estimates.
The International Monetary Fund cut its 2012 growth forecast on Jan. 24 to 3.3 percent from 4 percent and warned that Europe’s debt crisis threatened to derail the world economy. The World Bank reduced its estimate by the most in three years on Jan. 18, to 2.5 percent from 3.6 percent.
“It’s significantly oversupplied,” said Jesper Dannesboe, an analyst at Societe Generale SA in London. “There is no incentive for zinc producers to cut back. If demand is not improving for zinc, then the price will have to fall again.”