Hello everyone,
If we were to go back to just a year ago, not a long time, we would see that the cash sale price of zinc on the London Metal Exchange (LME) was at $1,980/mt. And just one year later, on January 10, 2007, the closing price of the same commodity for cash sale appears as $3,670.50/mt. In brief, any investor who invested in zinc shares a year ago would have obtained around 85 percent on his investment by the end of the year. I think that to speak of the devil under the visible part of the iceberg would be advisable before passing to the building up of forecast-oriented assumptions. Aside from the factors which have caused zinc prices to increase so far, what are the causes leading to the sudden drop of recent days?
The answers to these questions are of great importance not only for the buyer-seller investors in the London Metal Exchange, but also for the
galvanized steel producers and consequently its consumers, as
galvanized steelmaking is the basic area of zinc use.
First of all, let us name the dynamics which have caused the changes in the zinc prices. So today, if we are to make a short list of the ordinary market conditions which affect LME zinc prices, ignoring extraordinary events such as wars, catastrophies and cartel actions;
Dynamics affecting prices;
• Quantity of zinc in LME inventories: Of course, the inventory and the price level move in inverse relation.
• The seasonal position of
China: For example, the monthly zinc export of
China in 2003 was over 30.000 tons in average; whereas, from 2004 onwards,
China began to import zinc. Such a big producer certainly affects the general level of zinc prices in a significant way. (In 2005,
China's zinc imports increased up to 60.000 mt per month, while the zinc deficit –consequently,imports- in 2006 remained around 15.000 mt in general).
• Speculations: These are the elements which break out as rumours in the beginning but affect the reality in the end, thus causing a change in the zinc prices. For example, the rumour saying that the tariff rate for zinc imports in
China might be increased effective from February. Or, the misinformation of the buyers by traders who have small volumes, regarding the low level of zinc remaining in the LME inventories.
Now, let us interprete the above-metioned factors together. The quantity of zinc which has been entering the LME inventories over the last three months is 277 mt per day on average, while the quantity which exits per day is 1,343 mt. Briefly, the inventories of LME have decreased by 76 percent compared to a year ago. I think this is the most important reason for the continuous increase in prices throughout last year.
Looking at the second item,
China's seasonal position,
China has again commenced exports of zinc. The zinc exported by
China is both destined for the inventories of end-users and for LME inventories. However, as I mentioned just above, the principle determinant is the decrease in LME inventories, and the zinc introduced by
China to the market will only be able to slightly slow down the rapid ascent of the general price level. As a matter of fact, the LME inventories are continuing to regress despite the exported surplus in
China. This means that the reason for the recent price regression of 17 percent is not
China.
So then, what is the factor hidden behind the curtains which has led to the 17 percent price decrease in zinc prices since the beginning of 2007?
Although disclosing the invisible part of the iceberg and reaching to the core points have not been easy; everything seems quite visible now after the information is obtained and the picture is deciphered. Here lies the importance of speculations. I think, the most important reason which has drawn the prices down in a time as short as 10 days is Dow Jones AIG Commodity Index' commencement of the steady continuous sale of a high amount of shares over the last two weeks for a particular purpose. Definitely, a long-term drop is not expected and Goldman Sachs, again one of the largest players in the stock market who has at a minimum as much zinc shares as AIG Commodity, has preferred not to sell the shares it holds, despite the sale decision of rival AIG Commodity. Meanwhile, if you are wondering about how the buy-sell decisions of these two companies can affect us, then I would like to remind you that LME is a considerably big market where annually $3 billion-worth of buy&sell operations are made. Furthermore, both Goldman Sachs and AIG Commodity are the major investment companies which can change the balances in that stock market.
Conclusion: As a person who monitors the zinc market for professional reasons –as this is literally vital for
galvanized producers- I believe that the current temporary price regression will end, and that a rebound will begin in a short time. This
opinion is also supported by the professional analysts at the New York Stock Exhchange, with whom I found the opportunity to exchange ideas while carrying out my inspections regarding the sudden price decrease. Briefly, whether you are a stock investor or a
galvanized producer, today seems to be the right time for stocking as much zinc as possible by taking advantage of the current price decline, before the prices return to their previous levels (the prices are even expected to reach 5.000 $/mt in the short term).
Görkem Bolaca
Foreign Trader
Tezcan Galvaniz