By Raul de Frutos
Nickel and zinc are two base metals that every commodity investor is talking about right now. Both metals have benefited from a bull narrative of supply shortfall this year.
On top of that, they both are benefiting from higher demand coming from China, which is being reflected in the surge in Chinese imports this year:
Three-month London Metal Exchange Zinc price. Source: FastMarkets.com.
Zinc investors have been drawn in by the narrative of mine closures and a resulting tightening of the supply chain. As zinc prices weakened over the past three years, more than 1.5 million metric tons of mine capacity were either idled or closed permanently.
These closures were further exacerbated when Glencore (OTCPK:GLCNF) announced its plans to suspend 500,000 mt of production last October. Although many people called for a tight market in previous years, in 2016 it really seems to be happening while the development of new mines is being restrained by limited capital to invest in new projects.
Other than the supply shortage, we are witnessing strong Chinese demand, likely thanks to a boost in infrastructure spending. Net imports of refined zinc more than doubled to 280,800 mt in the first half of 2016, showing strong appetite for the metal. At the same time, China's own production of refined zinc fell by 1% over the same period.
Zinc production - usage in thousands of metric tons. Source: MetalMiner.
Indeed, according to preliminary data recently compiled by the International Lead and Zinc Study Group, zinc is finally in deficit territory for the first time since 2014. The global market for refined zinc metal was in deficit by 64,000 mt from January to May 2016, with total reported inventories falling by 24,000 mt over the same period.
Three-month LME Nickel Price. Source: Fastmarkets.com.
In the case of nickel, the supply shortage comes as the new mining minister in the Philippines, Regina Lopez, said there would be a ban on fresh mining exploration in the country for a month while all existing mines are being reviewed. At present, the Philippines is the top supplier of nickel ore to China, and these new developments have sparked concerns about ore supply to the country.
On top of the supply shortage, refined nickel imports in China have surged by 189% to a record 226,100 mt in the first half of the year.
What This Means For Metal Buyers
When the metal you buy is rising in price while the fundamental picture is suddenly turning bullish, there is no time for second thoughts. Hedge metal needs and protect your budget.
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