Zinc prices to see record levels in 2006?

Zinc prices to see record levels in 2006?

After falling below the $1'200/mt level in July of this year, zinc prices on the London Metal Exchange (LME) have mounted a remarkable comeback, surging past the $1'400/mt levels of early spring to hit $1'640/mt by mid-November. Zinc price negotiations for long-term contracts are expected to begin soon. However, the stable price increase and zinc shortage in global markets will definitely carry the negotiations into January. Canada's Teck Cominco Ltd., the largest zinc miner in the world, will probably ask for a strong increase, and galvanized steelmakers will probably have little choice but to accept it. Australia's Zinifex, the second largest zinc miner of the world, also forecasts a bright year in 2006. The significant increase in China's zinc imports has the company considering a strong increase in 2006 prices. Neither of these two zinc producers plans to increase their mining capacity over the next two years. There is an extreme tightness in the zinc concentrate market because the number of zinc miners has not increased much since the mid-1990s. The global supply of zinc products in 2005 is projected to be short by some 300'000 metric tons. This is partly due to expectations that output for the whole year will increase 0.5 percent while the consumption will increase 2.8 percent. The short supply in the global zinc market is partly due to the decrease in China's export volume, while its import volume went up. China's current output of zinc accounts for 25 percent of world output. Nevertheless, the country became a net zinc importer last year due to the increase in galvanized steel production. The global zinc output in the second half of this year is likely to be lower than that of the first part. Current levels of zinc prices are close to the record level in 1997. Yet, they are expected to increase more in 2006. However, looking at the galvanized steel prices, we see a continuous decline throughout the year. The average global price of hot dip galvanized steel was over $850/mt in January, and it continuously decreased till June and then slightly increased in August. Then the declining trend continued, and the price has fallen to around $600/mt in November. This is also closely related with the imports and exports of China. China's import volume of galvanized sheet declined, while that of export increased. In the first nine months of 2005, China imported 3.029 million metric tons of zinc-galvanized sheet, down 12.27 percent from a year earlier. At the same time, the country exported 601'300 metric tons of zinc-galvanized sheet, a year-on-year increase of 132.71 percent. China's zinc consumption index is in a stable upward trend. In the Chinese market, the consumption of galvanized sheet accounts for half of the zinc consumption volume, and the expansion in galvanized sheet is the main force pushing up demand for zinc. The output of galvanized sheet will also keep increasing; therefore, the profits of galvanized steel producers may fall as their margins are squeezed by the rising price of zinc.