After a 6.2% decline in 2009, RBC forecasts a rebound in global zinc demand of 11.3% in 2010. “China remains the main driver of zinc demand growth, though demand outside China has rebounded strongly in 2010 on the back of restocking. We forecast further growth of 6.5% in 2011 and 2012, followed by trend growth of approximately 3.0% in 2013. In 2014, we expect demand growth to be limited to only 2% by a lack of supply.“Our analysis [of supply] points to excess smelting capacity and continued low utilisation rates throughout our forecast period as mine supply remains the bottleneck. After a decline of 4.1% in 2009, refined production is estimated to have rebounded by 9.3% in 2010. We forecast further growth of 5.5% in 2011, 5.4% in 2012, and 2.4% in 2013. In 2014, we expect refined production to decline by 4.2% due to a shortage of concentrate.

“Our forecast rebound in demand will be matched by rising mine capacity in 2010 through 2012, leaving the market in a surplus to balanced position until 2013, when we expect the concentrate shortage to become acute. In 2014, we expect a shortage of mine supply to result in a sharp drop in utilisation rates and a large deficit, drawing inventories down below critical levels and driving a strong rebound in price.

“The zinc price remains above the bottom of its historical range in real terms compared to inventories as weeks of consumption. With inventories high and capacity utilisation below full effective rates, the fundamentals do not justify current price levels. In a surplus market, the marginal cost of production would normally be expected to be a key determinant of prices. Our cost analysis suggests that marginal cost at the 90th percentile of the cash cost curve is roughly $0.65/lb. While we believe sufficient closures to balance the market would likely occur at prices higher than $0.65/lb, the analysis points to downside risk in the near term. We forecast an average price of $0.97/lb in 2010, $0.90/lb in 2011, $0.90/lb in 2012, $1.00/lb in 2013 and $1.30/lb in 2014. Our long-term price forecast is $0.90/lb in 2010 US$.

Risks to Forecast

• Investment Demand – Investment demand remains a key driver of commodity prices, leaving prices vulnerable to increased volatility. The emergence of physical ETFs could have a positive influence on prices
• Economic Growth – If sustained growth in the developed world is more muted, the market could result in a larger surplus in 2011
• China – Slower demand growth in response to government measures to cool economic growth could result in a larger surplus in 2011
• Supply – Stronger producer discipline than we are currently assuming could limit the market surplus and support a recovery in the zinc market sooner than we are forecasting. Conversely, continued high prices could encourage the restart of idled capacity, leading to larger surpluses.