The prices of some commodities, such as oil and iron-ore, may remain depressed in the near term, but zinc appears poised for growth. The price of the base metal, which is used mainly to galvanize steel and mixed with copper to make brass, has climbed by 20% since mid-March to last week's peak of $2,400 per tonne. Overall, zinc has climbed 7% this year at the London Metals Exchange, and could continue going higher.
The recent increase in prices is due in part to the growth in speculative interest. As per LME's most recent Commitments of Traders Report dated May 8, traders held 98,417 lots of net long positions in zinc - that's equivalent to more than one-fifth of the total number of futures contract. No other base metal at the LME has higher long positions.
Despite skepticism, I believe the heavy investment flows are not unfounded. With supply cuts coming from mine closures and healthy demand, Zinc's fundamentals have been improving. The Brunswick and Perseverance mines located in Eastern Canada, which were owned by Glencore (OTCPK:GLNCY), closed in 2013. This contributed to zinc's 60,000 tonne deficit in that year. This shortfall expanded to nearly 310,000 tonnes last year and will continue expanding on closure of some of the biggest mines in the world in the next two years.
The Century mine in Australia is going to shut down this year as it reaches the end of its life. Century, which was indirectly owned by Chinese government controlled Minmetals Corp, was the world's third biggest open cut zinc mine and represented 4% of the global output. In addition to this, Vedanta Resources' (OTCPK:VDNRF) giant Lisheen mine in Ireland, Europe's second largest zinc mine, is going to close in the third quarter of this year. Besides, some relatively smaller European and African mines are also nearing the end of their lives. Meanwhile, new deposits of the metal have remained elusive, forcing producers to explore in the remote corners of the world.
The positive impact of closures will be partly offset as some of the producers bring previously closed mines back online due to improvement in prices. Australia's Energia Minerals, for instance, is going to double its zinc output by restarting its flagship Gorno facility located in Italy in the coming years. On top of this, zinc producers and consumers are sitting on top of 1.5 million tonnes of refined zinc stocks, according to International Lead and Zinc Study Group. Due to these two factors, it is unlikely that zinc prices will rebound quickly. But no major zinc mine is lined up to begin operation anytime soon while growing deficit will lead towards a drawdown of inventories. In other words, zinc is moving into a sustainable deficit market. Therefore, I believe prices are going to increase, but it is going to be a slow process.
For investors, however, pure-play zinc stocks or exchange traded funds are extremely rare. This is due in part to the industry's consolidation which happened a few years ago in which smaller zinc producers were acquired by the bigger players. For exposure to zinc, investors have to either look into zinc-levered metals producers, such as Hudbay Minerals (HBM) or Teck Resources (TCK), or early stage companies that are on track to become major zinc producers in the near future such as Nevsun Resources (NSU), or foreign companies that do not trade on any major exchange in the U.S., such as Hindustan Zinc (OTC:HNDZY) which is the world's second leading zinc producer with an enviable low-cost advantage.
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