The first retreat in Chinese zinc output in three decades and record global demand are spurring Morgan Stanley to predict the end of a six-year glut.
Consumption will outpace supply of refined metal by about 100,000 metric tons in 2013, equal to what the U.S. consumes in a month, with at least four more years of deficits, the bank estimates. Zinc will rally as much as 19 percent to $2,350 a ton by the end of December, according to the median of 11 analyst estimates compiled by Bloomberg.
Prices that fell 57 percent from a record in November 2006 drove refiners in China, the biggest producer, to cut annual output for the first time since 1983. Supply is declining just as steelmakers, the largest users, expand steel smelting at three times last year’s pace. While zinc stockpiles are near their highest in two decades, about 60 percent of the metal may be tied up in financial transactions and unavailable to consumers, Societe Generale SA estimates.
“All of the signs to me are that demand is improving,” said Peter Richardson, the chief metals economist at Morgan Stanley in Melbourne who has tracked metals for a quarter century. “Supply in the form of inventory availability is restrained and likely to become more restrained.”
Zinc fell 4.7 percent to $1,981.75 this year on the London Metal Exchange as the bourse’s LMEX Index of six metals dropped 2.7 percent. The Standard & Poor’s GSCI gauge of 24 commodities gained 0.4 percent and the MSCI All-Country World Index of equities gained 6.3 percent. Treasuries lost 0.6 percent, a Bank of America Corp. index shows.
Refined supply declined 3.5 percent to 12.66 million tons last year, as Chinese output retreated 7.5 percent to 4.83 million tons, according to the Lisbon-based International Lead & Zinc Study Group. Consumption dropped 2.8 percent.
Production will rebound 5.6 percent to 13.59 million tons this year, as demand surges 9.6 percent to 13.59 million tons, Morgan Stanley estimates.
Supply is also constrained because so much is locked up in warehouses and can’t trade freely. Stockpiles monitored by the LME jumped 39 percent to 1.21 million tons in the past year. As much as 60 percent of stockpiled metal may be tied into financing deals, according to Societe Generale, which expects a supply deficit of 270,000 tons this year.
The transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery months cost more than nearer-dated metal. Zinc for delivery in June 2014 is trading at a 4.2 percent premium to this month on the LME.
Orders to remove zinc from warehouses, measured through so-called canceled warrants, now represent 49 percent of inventory, from 2.1 percent a year ago, data from the LME show. Stored metal tracked by the Shanghai Futures Exchange is already 15 percent lower than a year ago, according to the bourse.
About 50 percent of zinc is used to rust-proof steel, 17 percent goes into brass and bronze and the same amount into die-cast products from bathroom fixtures to car parts, data compiled by Bloomberg Industries show. Global steel output will advance 4.7 percent to a record 1.62 billion tons this year, from growth of 1.4 percent in 2012, according to MEPS (International) Ltd., a Sheffield, England-based industry consultant.
Any turnaround in the zinc market, where prices have dropped in four of the past six years, may be undermined by signs of slowing economies, with the 17-nation euro region already back in recession. Europe accounts for 18 percent of zinc demand, according to Barclays Plc. While the International Monetary Fund expects global economic growth of 3.5 percent this year, from 3.2 percent in 2012, the Washington-based group cut its estimate three times since July.
Barclays says the surplus will decline to 273,000 tons this year, from 338,000 tons in 2012. Goldman Sachs Group Inc. said in January the glut would narrow 54 percent to 181,000 tons in 2013 and this month projected a price of $2,100 in 12 months, or 6.1 percent more than now. Gains in Chinese production should offset growth in demand, the bank said.
As refiners curbed supply last year, mines produced 5.1 percent more, according to the study group. Mines will expand another 6.7 percent this year, Morgan Stanley estimates.
There is ample ore available to increase refined output at the right price, Macquarie Group Ltd. said in a report Feb. 25. Chinese zinc production reached a record 479,983 tons in December, after futures rebounded 9.4 percent in November, Beijing Antaike Information & Technology Co. estimates. The average Chinese smelter needs $2,500 to break even, or 26 percent more than now, according to Liu Mengluan, an analyst at the state-backed research company.
The predicted rally in prices comes as Xstrata Plc closes its Brunswick mine in Canada this month, an operation which yielded 2.9 million tons of ore last year. About 841,000 tons of mine output will be lost by 2014 as Xstrata also shuts the Perseverance mine in Canada and Vedanta Resources Plc closes Lisheen in Ireland, said Kenneth Hoffman, an analyst at Bloomberg Industries in Skillman, New Jersey. The total will rise to 2 million tons by 2017, he said.
Global car sales will advance 2.4 percent to 82.7 million units this year, according to LMC Automotive Ltd., a research company based in Oxford, England. About 17 pounds of zinc are used to protect the average vehicle from rust, 20 pounds goes into parts including handles and locks, and each tire contains about half a pound of the metal, according to the American Galvanizers Association.
Demand in China, which consumes 45 percent of supply, will rise 13 percent to 6.07 million tons this year, Morgan Stanley estimates. The nation’s government said March 5 it planned to open 5,200 kilometers (3,200 miles) of new railway lines and build 80,000 kilometers of highways, boosting demand for steel. Urbanization will bolster metals demand, Jiangxi Copper Co., the country’s largest producer, said the same day.
“China’s appetite for zinc will continue to increase this year for infrastructure,” Tetsu Emori, the chief fund manager at Astmax Investment Management Inc. in Tokyo, which manages about $760 million of assets. “Economies in the U.S. and Europe will gradually be improving this year, supporting demand prospects for industrial metals.”