Selwyn Resources says of the zinc market: “One message is clear, most analysts are in agreement that post 2011, zinc supply will be in shortfall and higher prices are on the way. Macquarie (April 2008) has forecast a rise in zinc price to $1.50 some time in the next five years; some of us think it will come sooner than that. Remember, zinc peaked at $2.09/lb in November 2006 and can do it again.”
The low zinc price is taking its effect and by the end of the second half of this year, supply and demand may well be in balance, according to Selwyn. Zinc mine production consists of a few large mines and many small producers. Historically there has been little discipline to manage supply. Recently there is evidence of modest efforts to reduce zinc concentrate supply; largely in an effort to reduce losses. Price response has included early shutdowns (Lennard Shelf, Balmat), reduced development and the mining of higher grades (Myra Falls – Breakwater, Endeavor – CBH, Broken Hill – Perilya) and project delays (Perkoa-AIM). As the reporting of operating losses increases (SRA – East Tennesse, Blue Note – Cariboo) more reductions in supply may occur and help to rebalance the zinc market.
The timing of the return to supply balance will determine how big an inventory overhang will be built in the coming months; before some of the major mine depletions kick in; the first of which is Brunswick in Q1 2010 (235,000 t annually). Perhaps the bigger question is zinc consumption due to economic slowdown in US, Japan and Eurozone.
In the first half of the year, market concerns were on possible significant decrease in China’s output and consumption due to snowstorms, the Sichuan earthquake, power disruptions and possible smelter cutbacks. American Metals Markets recently reported that loss of Chinese production may only total 40,000 t and it is now widely expected that post Olympics output and consumption of zinc in China may make up these losses. There is ample smelter capacity in China and new additions in progress; the key going forward will be availability of concentrates.
Perhaps the key determinant of supply balance will be whether mines having cash operating costs higher than current low zinc prices, shutdown. As the cash cost curve indicates significant production could be lost during a prolonged period of low zinc prices. The initial response (Lennard Shelf, Balmat and Endeavor, CBH) has removed approximately 120,000 t on an annualized basis; but more cuts are likely.
The full report can be read on http://www.selwynresources.com/download_zinc_info.cfm?doc_ID=10