Commodities | Oct 16 2006
By Greg Peel
Since the May correction, zinc prices have found it difficult to rebound, but the tide may be turning. Chinese production of galvanised steel has rebounded strongly, notes National Australia Bank, and China is expected to account for 30% of global zinc demand in 2007.
UBS reports zinc stockpiles at the LME have plummeted from 393kt at the beginning of the year to a 15-year low of 134kt now. This equates to less than one week of current consumption and is below the “critical” level.
There are few zinc mines on the drawing board, notes UBS, as high costs are rendering returns hard to justify. In the meantime, existing operations are working “flat out” which increases the risk of supply disruptions through breakdown.
NAB expects the zinc market to remain in deficit in 2007, and for prices to rise some 20%. The only dampener on the horizon is increased construction of Chinese smelting capacity, suggests UBS. China is currently a net importer, but plans are on the drawing board which would possibly signal a return to the 90s era of depressed prices through Chinese overcapacity.
Given the Chinese government is now far more wary of such developments, such a result is not guaranteed. Either way the suggestion is that zinc prices may go a lot higher before they go lower again.
To invest in a zinc pure-play in Australia, one turns to Zinifex (ZFX). Arguably one of the most volatile stocks on the market (trading in line with zinc price assumptions) brokers are split between the likes of Credit Suisse – the analysts are positive on zinc and rate Outperform with a $15.08 target – and Merrill Lynch – the analysts believe sustained high zinc prices are already priced in and recommend sell down to at least $9.00.
JP Morgan is even more bearish with an Underweight call and a target of $8.30. UBS is a Buy with $13.50. Zinifex last closed at $13.08. Investment in Zinifex is for the risk-thirsty punter with a strong view on the zinc price.