Material Matters: Lead And Zinc Fundamentals, Plus Iron Ore And Platinum

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By Chris Shaw

Macquarie has looked more closely at the zinc and lead market data released last week by the International Lead Zinc Study Group and China's National Bureau of Statistics that showed both metals remain in surplus.

Having increased in May, the surplus is heavier in zinc at 209,000 tonnes or 4.2% of reported consumption, while Macquarie notes in the lead market the surplus was just 34,000 tonnes or less than 1% of reported consumption.

For zinc it has been record production driving up metal stocks, Macquarie noting the increases in output have been enough to outrun what has been a relatively robust recovery in demand over the past year.

With stockpiles increasing Macquarie suggests there is downside risk for the zinc price, especially as it is likely to take a period of price weakness to put producers under enough pressure to cause a reduction in supply of the metal.

This implies a price below US$2,000 per tonne according to Macquarie, as at this level the stockbroker estimates most of the world's production remains profitable. ASX-listed companies offering exposure to zinc include Intec Ltd ((INL)), Prairie Downs Metals ((PDZ)), Abra Mining ((AII)), Kagara ((KZL)), Perilya ((PEM)), CBH Resources ((CBH)), Terramin Australia ((TZN)) and Meridian Minerals ((MII)).

As well, Zinc Co Australia ((ZNC)), TNG Ltd ((TNG)), Overland Resources ((OVR)), Union Resources ((UCL)), Tri Origin Minerals ((TRO)), Metals Australia ((MLS)), Blackthorn Resources ((BTR)), Jabiru Metals ((JML)), Rox Resources ((RXL)), Anglo Australian Resources ((AAR)) and Bass Metals ((BSM)) provide varying levels of exposure.

Conditions are different in the lead market in Macquarie's view as if there is any pullback in zinc production there will be supply issues in lead as well given it is essentially a by-product of zinc mining. Macquarie expects the lead market will move closer to balance in coming months, something that should support prices in its view.

Turning to iron ore, Deutsche Bank suggests the steel making raw material markets in Asia have now entered a period of negative cyclicality, as Chinese industrial production is decelerating faster than expected and is likely to slow further in the broker's view.

At the same time, steel inventory levels in China are quite high, which suggests some de-stocking will be required. This process appears underway in the broker's view, but is likely to take at least a couple of months to be completed.

In such an environment iron ore imports into China are likely to slow by as much as 10-15% over the next few months, which would be significant as UBS notes China accounts for about 70% of global seaborne trade of iron ore.

Any change to Chinese buying levels therefore would likely put downward pressure on iron ore prices. But Deutsche Bank suggests Chinese buying activity could then resume sooner than is currently expected, especially if raw material supply agreements are broken in the meantime. This leads Deutsche to suggest there may be only a very short window of opportunity for buying iron ore at cheap levels, potentially being as short as one month.

What supports this view is China's position at the top of the iron ore cost curve, UBS noting production in China is far more expensive than for the likes of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Vale. This implies if prices fall for any length of time Chinese production will come under pressure, which should in turn prove supportive for prices.

Cheap levels in Deutsche's view imply iron ore at prices of US$105-$110 per tonne, so the stockbroker would be looking to buy iron ore if prices dropped to within this range.

In platinum there has been some good news for the market of late, RBS Australia noting strong investment activity in the market in the first half of this year has absorbed the pre-investment surplus in the platinum market.

Industrial demand for the metal also looks likely to increase in the fourth quarter of this year in RBS's view, given expectations for a recovery in the global auto market. This would reduce the platinum market's current reliance on investment.

On RBS's numbers, while the platinum market should still be in surplus in 2011 the surplus is likely to be smaller than in 2010, something the stockbroker expects will also be helped by stronger Chinese jewellery offtake. As evidence of growing Chinese demand, RBS notes platinum imports for January to May this year came in at 36 tonnes, up from 16 tonnes in the same period in 2009.

What excites RBS about platinum's prospects is not only is demand from China growing, but there is little or no potential for the Chinese to increase their output of the metal. In other words, as demand increases so too will Chinese imports.

Longer-term this implies upside to prices in the broker's view, RBS forecasting an average price in 2013 of US$2,000 per ounce compared to its forecast for 2010 of US$1,550 per ounce.

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