China’s Rusty Cars Set to Sustain Rally for 2016’s Top Metalby
Aging operations mean zinc market needs new mines: Heron CEO
Zinc has surged more than 43% this year on supply constraints
China’s drivers will increasingly demand rust-proof cars. That’s good news for the price of zinc, the anti-corrosion fighter that’s already this year’s top performer among base metals.
Annual passenger vehicle sales in China will rise to 24 million in 2020, from 19 million last year, McKinsey & Co. forecasts. Only about a third of locally-manufactured autos use galvanized panels to prevent corrosion and rusting, according to Heron Resources Ltd., a developer that’s joining rivals who are building or reopening zinc mines.
“You have got the largest growth market in the world for vehicles and people will continue to push for higher product quality,” according to Wayne Taylor, chief executive officer of Sydney-based Heron, which is planning to reopen a zinc operation in Australia that was shuttered in 1998 on low prices. “It’s difficult to see, without a collapse in general commodities consumption, that zinc is going to back off.”
Zinc has rebounded this year on demand growth and a supply crunch, amid production cuts by Glencore Plc and closures including MMG Ltd.’s Century mine that have curbed supplies from Australia to Ireland. Zinc market fundamentals are on a strong footing, and likely to sustain the price rally for the next few quarters, according to Hindustan Zinc Ltd., Asia’s biggest base metal producer by market value.
Domestic automakers in China, where more vehicles are sold each year than the U.S. and Japan combined, rarely use galvanized steels, according to the International Zinc Association. Switching to the material would require about 350,000 metric tons a year of additional zinc, the association estimated last year. A similar move in India would need an extra 150,000 tons annually, it said.
Demand from China’s automakers will support continued zinc consumption growth, while more existing mines are reaching the end of operations as they are depleted, Heron’s Taylor said Wednesday in an interview. “These things ultimately have to be replaced and there isn’t a pipeline of projects that can sensibly cover off what is an aging production base,” he said. “We also continue to see consumption growth, it may not be quite as strong as it has been in some years, but still Chinese consumption growth is increasing.”
The key downside risk to the zinc market in 2017 is a faster-than-expected restart of idled mine capacity, Citigroup Inc. said in a note received Monday. Nyrstar NV, Europe’s largest refined-zinc producer, will restart its Middle Tennessee mines in the first quarter of next year. The operations were placed in care and maintenance last December.
A zinc market deficit may peak this year at 434,000 tons, though prices will continue to rise through 2018 to $2,580 a ton, according to Citigroup. Zinc for delivery in three months rose 0.5 percent Wednesday to $2,332 a ton on the London Metal Exchange.
Heron is seeking to resume output from its Woodlawn operation, about 250 kilometers (155 miles) southwest of Sydney, as soon as 2018 and aims to raise production to 40,000 tons a year from 2020. Investors are voting Thursday on a plan to spin-off its gold and nickel assets to allow Heron executives to focus on its zinc ambitions, said Taylor, who previously managed Glencore’s base metals business development.
The developer is holding talks to raise as much as A$195 million ($150 million) in debt and equity funding for the project and also is in discussions with traders and smelters, Taylor said. “There is a lot of enthusiasm to get hold of this material,” he said. “Freely available zinc concentrates or zinc material on the market place is as scarce as hen’s teeth, especially the stuff that can be brought into production in the next 18 months.”