“Some major refined zinc producers have recently been commenting on the improvement in their order books through the second half of 2009, primarily in China, but also in Europe and the North America,” Macquarie Research reports. Teck Resources’ announcement last Thursday’s was another that suggested that zinc order books have improved significantly over this period. Teck announced that its Trail Operations will return to full refined zinc production of 25,000 t/month, effective September 1 after operating at a curtailed rate of some 20,000 t/month since December 2008.
Teck also said that strengthening customer demand over the past several months has depleted refined metal inventories to minimal levels, and orders for specific products by a large number of steel mill customers for 3Q and 4Q are 44% above the order rate for the first half of the year.
This data point ties in with the Macquarie Research view that zinc demand “has bottomed out in China and the world ex-China in the 1H09 and that demand will rise strongly through the 2H09, with much of the refined stock build being worn off in China. The recent increase in stock on the LME only reflects, in our view, the delivery of material previously accumulated surplus zinc into the market to take advantage of the recent strong rally in prices.
“There is evidence to suggest that there could be a sharp snap-back in zinc demand in China in the 2H09, following a period of de-stocking of galvanised steel (which accounts for 50% of first use demand for refined zinc) in the 1H09. In the 1H09, car output rose by 17% YoY in 1H09, and construction was up by 13% YoY, however galvanised steel output fell by 3% YoY, suggesting de-stocking of galvanised steel in China.
“Supporting this is the fact that galvanised stock data from the Chinese trading hubs of Shanghai and Shandong point to falling stocks (in terms of weeks of Chinese output), a measure which has been strongly inversely correlated with galvanised steel prices in recent years.
“Indeed, galvanised steel prices in China have rallied by almost 30% since their lows in March and April of this year, likely encouraging increased production of galvanised steel. Prices have rallied in line with other steel prices in China, owing to strong growth in demand from the car and construction industries, which is expected to continue to grow strongly in 2H09. In this case, refined zinc demand will rise significantly in order to end the de-stocking of galvanised steel in China.
“In the world ex-China, de-stocking of galvanised steel has also been significant, with US shipments and Japanese output down by 50-60% YoY in 1Q09. This cannot be sustained as real consumption is not down by this much.
“As de-stocking in the main end use sectors for zinc in the developed world comes to an end (de-stocking of vehicles etc), together with anticipated strong rise in galvanised output in china through 2H09, we expect zinc prices will likely trade at least current levels in 4Q09, with some upside potential. Indeed, with Chinese mine output running at full capacity at current prices, and with worldex Chinese restarts requiring at least current prices to justify re-opening, a new higher level of demand should be enough to balance the market by the end of 4Q09.”