BMO Capital Markets predicts that zinc prices will not fall much further on a sustainable basis this year, while long-term prices will recover to historic highs.
Global Commodity Strategist Bart Melek said his analysis points toward 3.5% annual zinc consumption growth in both 2008 and 2009 to 12.3Mt.
BMO forecasts that zinc prices will decline 44-cents this year to $1.03/lb, and average 90-cents/lb in 2009 and 85-cents/lb in 2010.
Zinc production is expected to increase about 6% and 7% in 2008 and 2009, respectively, to about 12.3 Mt. despite the harsh Chinese winter, the nation's massive earthquake, as well as power shortages in South Africa, according to BMO.
While Melek said Peru's La Oroya smelter labor problems and other potential strikes later in the year have affected BMO's production, incremental increases in mined output across the rest of the world and ample smelter capacity still make the current BMO production forecast very likely. However, the projected surplus looks to be quite small and contentious (especially if production is slow to return in the aftermath of the Chinese earthquake).
Melek suggested that longer-term, high-cost marginal producers should set the price as the sector operates at very high utilization rates. The cost structure for all producers, especially those on the margin, has moved sharply higher and may stay elevated, owing to high capex, labor, equipment and energy costs.
As Northern American and European zinc usage is on the slide, Melek's research revealed the rise of the consumer and infrastructure will fuel medium-term Asian zinc use. BMO's analysis has determined that China, India, Brazil, Russia and the recently admitted European Union members are likely to drive long-term zinc demand. ...infrastructure spending and internal consumption amid strong per capital income gains in these regions are on track to keep demand growing strongly.
Melek forecast that long-term zinc demand is expected to grow 3.7% annually to about 17Mt by 2018, with deceleration in 2010/11 and speeding up in the years after.
Meanwhile, BMO projects mine production will increase about 9% this year and 7% in 2009. While this is somewhat lower than mine capacity estimates suggest, it reflects strategic behaviors, labor disruption trends and the low current zinc price. For example, Teck Cominco has mused about reducing high cost production.
Capacity expansions at the Rampura-Agucha (India), San Cristobal & Cerro Lindo (Peru) and Lamping (China) projects, increased production at Broken Hill & Mount Isa (Australia), Aljustrel (Portugal) and Caijaying (China) as well as the Duddar (Pakistan), Gordonsville (USA), Penasquito (Mexico) and Perseverance (Canada) start-ups are expected to account for approximately 45% of zinc mine supply growth over the next two years.
Melek suggested that the necessary increase in mining output is expected to be filled by reactivated closed mines, expansions at currently producing mines, de-bottlenecking at existing operations, or the development of greenfield projects. Strategic behavior may also help determine capacity growth-in response to low market prices.
Zinc is projected to move to a small surplus following four years of deficits. This means the market has likely moved from an ‘auction pricing' model to more of a ‘marginal cost' pricing model, spurring considerable short selling on the part of the speculative community, Melek noted.