By SIMON CONSTABLE
Now might be a great time to galvanize your portfolio with zinc futures.
Why? Booming construction in China, combined with mine closures, could propel prices about 20% higher over the next couple of years, as demand for the metal outpaces output. The likely result: a supply shortfall in 2015.
Zinc has moved roughly sideways since March. But benchmark prices of the metal—used in construction, automobile production, and the manufacture of brass—could hit $2,400 a metric ton by 2015, about 23% above its recent quote of $1,955 on the London Metal Exchange, analysts say. A recent report from brokerage firm Natixis cites "the imminent demise of a number of significant [zinc] mines around the world," as a cause. Mineral deposits get depleted as ore is extracted. At some point, it isn't profitable to continue digging.
While mining companies are constantly seeking new deposits, developing likely sites into working mines can take years. As a result, growth in zinc supplies is slow, a trend likely to continue into 2014 and beyond, states a recent report from New York-based consulting firm CPM Group. Recycling can be expected to pick up as prices rise, but it won't be enough. Recycled metal already accounts for 40% of the zinc hitting the market, according to the International Zinc Association.
MEANWHILE, CONSUMPTION IS LIKELY to remain robust for two main reasons. First, China continues to urbanize. Says Natixis: "In China, investment in urban infrastructure remains a key pillar of the 12th Five-Year Plan," the blueprint for the country's economic strategy. China's annual economic- growth rate ticked up in the third quarter to 7.8%, due in part to government spending on urban construction. Two-thirds of the nation's 1.3 billion people are expected to live in cities by 2030, compared with about half currently, according to estimates.
That means more construction-sector demand for zinc, which helps protect steel from corrosion in a process known as galvanizing that accounts for half of all zinc use, according to the IZA.
The second factor boosting demand is automobile sales. U.S. vehicle manufacturing "is expanding nicely," notes metals broker INTL FCStone in a recent report. Production now translates into an annual rate of 15 million to 16 million vehicles, and zinc is used in various car and truck components.
Zinc output currently exceeds demand, but CPM Group expects that surplus to fall by 31% in 2013, to 184,000 tons, and to continue sliding until 2015, when the industry would post its first supply deficit since 2006. Overall consumption is likely to exceed 13.5 million tons in 2015, up from 12.4 million last year.
As a result, CPM predicts, prices could jump to $2,140 a ton. Natixis is even more optimistic, seeing $2,400 zinc in 2015, when it foresees an industry-wide deficit of 675,000 tons.
INTL FCStone sounds a note of caution: "Despite zinc's more constructive profile, the outlook for the metal is contingent on activity in the Chinese real-estate and steel sectors." In other words, if China tanks, likely so will zinc prices.
Benchmark zinc contracts closed at $1,955 a ton on Friday on the London Metal Exchange.
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