Spot prices will slide by 5%

By Staff -- Purchasing, 2/8/2001

What's happening: Zinc has been in heavy demand for some time from the makers of products that are used by the automobile, machinery and construction industries. Zinc is the fourth most widely used metal after steel, aluminum and copper. Almost half of the zinc used is "sacrificed" as the corrosion-protection coating on galvanized steel. Almost 20% is alloyed with copper to make brass and bronze. Another 20% is used to make die-cast parts, with the remainder used as chemical compounds in rubber, ceramics, paints, and agricultural and pharmaceutical products. Last year, North America consumed 2.15 million metric tons of zinc-70% in the U.S. That was a 3% increase over the 2.08 million metric tons used in 1999, which had been a record. Nonferrous metals market analysts say speculative interest in zinc on the commodity exchanges is dominated by negative sentiment regarding the U.S., where an economic slowdown increasingly is expected to reduce demand growth. Sales, in fact, have stalled lately, and may even slide this year. That's why U.S. market prices, which rose 3% in 2000 to 56¢/lb, now are expected to flop back to 1999 levels in 2001. "There are widespread expectations of a significant deterioration in market conditions next year," notes a report from CRU International in London.

Why it's happening: World demand was ahead of forecast at 8.67 million metric tons, an increase of 3% over 8.41 million metric tons used in 1999. International Lead and Zinc Study Group statistics show new-metal supply of 8.82 million metric tons, or 5.5% higher than the previous year. Upshot: A new-metal surplus of 150,000 metric tons. That compares with a 48,000-metric-ton deficit in 1999. Imports are important because 70%-75% of the metals used in the U.S. come from merchants who source material from offshore suppliers who price the metal based on London Metal Exchange (LME) quotes. Zinc's price on the LME averaged 60¢/lb in 1997 before collapsing under the weight of excess supply to 47¢the following year. It crept back to a 49¢average in 1999 as stockpiles were reduced. Last year, the LME average of 51¢was under the consensus forecast simply because supply continued to outpace demand. Worldwide demand for refined zinc metal is expected to increase by 2.4% to 8.88 million metric tons in 2001. Since average rate of increase in Europe, Asia and the U.S. is expected to be around 2%, the less-developed world is expected to pick up demand slack. Analysts at Economist Intelligence Unit in London project that refined zinc output growth also will slow to 2% in 2001 and that will cut the excess supply and support somewhat higher prices in 2001. Most other analysts disagree, suggesting at least 4% increases in new-metal supply from operates in Europe, South America and Asia, which will boost global stocks and keep downward pressure on prices. Example: China's Huidong Lead/Zinc Mine in Sichuan province started production in December on a new 25,000 metric ton/year refined zinc line, which will almost triple capacity-much of it destined for export.

What to expect: CRU says "zinc's excess market supply and pattern of end use make it more vulnerable than the other base metals to any economic slowdown in North America." The latest market forecast from the International Lead Zinc Study Group in London expects a substantial market surplus of zinc this year. "Net exports from former eastern countries in 2001 will amount to 824,000 metric tons, a similar level as in 2000," says the ILZSG report. "After taking this tonnage into account together with releases from the U.S Defense National Stockpile and adding it to newly smelted metal in Western World nations, growth in the supply of refined zinc again will exceed demand." Remember that more than 30% of the global zinc supply now comes from recycled zinc. As zinc-recycling technology has advanced, the supply of zinc available for recycling has grown-and that material also acts as a price depressant.

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