LME Zinc Prices Hit A 9-Month High: A Warning Flag For Buyers

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Includes: BDD, BDG, BOM, BOS, DBB, HEVY, JJM, JJT, RJZ, UBM
by: MetalMiner

Original post

By Raul de Frutos

Zinc prices hit a nine-month high last week helped by a broad recovery in commodity markets and improving supply/demand fundamentals within the zinc industry.

Three-month London Metal Exchange zinc hits a nine-month high. Source: Fastmarkets.com

Perhaps the Most Bullish Base Metal

Zinc (along with tin) has been the best performer among industrial metals this year. Zinc's long-term outlook appears to be quite bright, thanks to the number of key larger-scale mine shutdowns over the past few years.

The most recent shutdown, Century mine in Australia, stopped shipments early this year. Glencore, Nystar and others also announced significant production cuts. Combined, it's estimated that around 10% of global zinc production has been taken offline.

On top of that, there aren't really any new mines coming online to replace the lost production. So, with 10% of production coming offline and no new mines expected, demand only needs to be flat to create supply constraint going forward.

Macro Factors Finally Helping

Global demand is expected to increase by 1%, slightly improving from a 0.7% increases in 2015, according to International Lead and Zinc Study Group data. The demand growth is always uncertain in these situations, but hopes that the Chinese government may implement stimulus measures combined with supply cuts might be enough for a deficit to materialize and inventories to come down.

Even more important than deficit expectations is the recovery in commodity markets. A combination of rising oil prices and a weaker dollar is making investors pour money back into commodity markets and that creates a tailwind for zinc.

What This Means For Metal Buyers

For the first time since this brutal bear market started in 2011, commodity markets are showing signs of recovery. Zinc's outlook is positive and that can be reflected in its latest price performance. As zinc prices break key resistance levels, buyers better start hedging to minimize price risk.