Commodities | Jul 25 2012
– Zinc stocks now more than one million tonnes
– Market fundamentals remain weak
– Parallels with aluminium market identified
By Chris Shaw
For the first time since 1955 zinc stocks now stand at more than one million tonnes, which in Macquarie's view highlights what are poor fundamentals for the metal. Recent demand data has been weak and seasonal headwinds are now coming into play for the next few months.
Reported zinc stocks continue to rise, and Macquarie suggests this is likely to add further pressure to market sentiment. For the zinc market to re-balance by way of a supply side adjustment, Macquarie's view is the price is clearly at risk of falling further. As at current price levels producers are unlikely to volunteer to make a supply side adjustment, Macquarie sees scope for prices to fall by double-digits in percentage terms.
On the demand side, Macquarie estimates global galvanised sheet steel production fell in the June quarter by 1% in year-on-year terms, only the third fall in this quarter in the past 16 years. As output usually falls from Q2 to Q3 and given changes in galvanised steel output and zinc consumption tend to move in tandem, the implication is zinc demand will face seasonal headwinds in coming months.
At the same time a strong rise in Chinese mine output appears to be generating an emerging surplus in the zinc concentrates market. This is at the same time as reported zinc stocks continue to rise. Total reported zinc stocks relative to the market are at near 10-year highs at 48 days of consumption according to Macquarie, with total zinc stocks potentially 50% higher than this level. With the carry trade out of the money, this implies there is potential for some stock to be offered back into a market already in surplus.
This all adds up to zinc being a sell in the short-term at least for Macquarie, especially if warehousing activity helps push up metal premiums. Longer-term the zinc market outlook has also dimmed for Macquarie, as an extension to mine life at Century and the opening of the Gamsberg mine around 2015/16 could add around one million tonnes of material to global output over and above current forecasts. This implies a weak outlook for prices in the view of Macquarie.
Deutsche Bank has looked more closely at the structure of the zinc market model, seeing some parallels with aluminium. While zinc inventories recently passed one million tonnes, the fact 70% of the metal resides in New Orleans leads Deutsche to suggest a queue may be building to withdraw metal. This has potential to create a supply bottleneck.
The increased scarcity of zinc ingots has caused zinc premiums to tighten, so Deutsche sees the flow of zinc into New Orleans continuing if global demand conditions weaken as this would facilitate an increased stock build.
Until recently the shape of the forward curve for zinc had been similar to that of aluminium, so Deutsche sees parallels to the financial incentives for both metals given fairly well aligned fundamentals.
Based on current fundamentals, Deutsche suggests zinc is likely to move more convincingly into contango, especially given expectations for lacklustre seasonal demand and challenging emerging market conditions that may continue in the coming six months.
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