Zinc Outlook: Mine Closures May Push Prices Up in 2014

This time last year, the question most zinc market participants were concerned with was: how long will zinc prices rise? At the time, the base metal was sitting at $2,059 per tonne on the London Metal Exchange, having risen 13.7 percent in two months. 

Unfortunately, as fans of the metal soon realized, the answer to that question was “not long.” Zinc is down 2 percent this year, according to The Wall Street Journal, and from February 28 to December 20, its highest closing price was $2,039 per tonne.

However, disheartening though those figures may be, word is that zinc may fare better in 2014.

Haven’t we heard that before?

Those who have been following zinc this past year may be getting tired of hearing that the metal’s price is set to improve — just not quite yet. After all, that has been the rallying cry of market watchers — from Haywood Securities’ Stefan Ioannou to analysts at Research and MarketsFastMarkets and HSBC Holdings — for at least the past six months.

Zinc market watchers are probably also tired of hearing the counterargument that zinc prices will go almost nowhere in 2014 — or indeed 2015 and 2016.

Both perspectives were outlined last month by Zinc Investing News. As noted at that time, at the heart of the matter is the question of whether new zinc mines being built by the likes of Canadian Zinc (TSX:CZN,OTCQB:CZICF), Donner Metals (TSXV:DON) and Trevali Mining (TSX:TV) will overpower the market with their production or merely fill the gap that is being created by the closure of major zinc mines such as Canada’s Brunswick and Perseverance.

Those who are bullish on zinc believe such new mines will fill — or perhaps not quite fill — that gap, while bears believe they will increase the zinc surplus, which sat at 153,000 tonnes last year.

Is the tide turning?

While both perspectives are now old hat, several recent developments have added clout to bulls’ arguments.

One is MMG’s (HKEX:1208) announcement that its Dugald River lode, which was supposed to begin producing zinc in 2015, is going to miss its start date, as per Mining Weekly. That’s an issue largely because output from the new mine is supposed to “partially replace lost output from the nearby Century mine” — production from Century, one of the largest zinc mines in the world, is currently on the decline, and the mine is set to close in 2016.

Another is the fact that Chinese zinc demand is on the rise. The country imported 486,000 tonnes of the metal in the first 10 months of 2013, up 20.3 percent from the same period in 2012, Mining Weekly also reported.

Finally, in the past couple of weeks, more analysts have come out of the woodwork in support of zinc. For instance, Moneyweb quotes Andrey Kryuchenkov, an analyst at VTB Capital, as saying, “[z]inc looks most interesting in our view as supplies tighten, while demand, and especially from the steel sector in China, continues to improve.”

“Zinc could well finally break out of the … $1,800 to $2,000 range and return into the early 2011 range between $2,400 to $2,600 on the 3-month benchmark contract,” he also said.

Similarly, Richard Davis, a mining-fund manager at BlackRock (NYSE:BLK), told The Wall Street Journal that zinc is “where the opportunity is” because “[t]here could be quite a big gap opening up between supply and demand.”

Not too shabby for a metal that spent 2013 down in the dumps.

What to watch for

Even so, what zinc prices will do next year is far from certain. For that reason, those interested in the metal would do well to keep an eye on the following factors:

  • Mine closures: Are the mines that are scheduled for closure still set to close? Have any new mines been taken out of commission?
  • Start ups: Many of the zinc mines that are supposed to begin production in the near future are run by juniors miners, which as a whole are having a hard time raising funds in today’s market. Are their mines still on schedule to start producing?
  • China: As Zinc Investing News reported last month, some believe that even if zinc prices do rise, Chinese zinc producers “could respond rapidly … boosting production and calming the market.” How is China responding to zinc market action? And is Chinese zinc demand still strong?

Until there is some action in those arenas, sitting tight may be the best option for those not ready to commit to either the bullish or bearish camp.

In the meantime, think zinc!

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Are New Mines Threatening Zinc’s Positive Price Outlook?

Zinc’s Medium-term Outlook Positive, Says Haywood’s Ioannou

Think Zinc for Longer-term Gains, Analysts Reaffirm

Analysts Divided: Will Zinc Prices Rise in the Next Few Years?