13.   MACRO-ECONOMICS AND COMMODITY PRICES

13.6.1  

Introduction

The primary use of zinc is in the galvanising of steel, which in 2005 accounted for 46% of zinc usage. The next largest use is brass (17% of total demand) followed by die-casting. It is anticipated that by 2017 galvanising will account for about 54% of global zinc usage. In terms of end use sectors, zinc consumption is dominated by the construction sector, which accounted for 45% of zinc usage in 2004; the next largest end use is in the transport sector. It is expected that zinc end usage will continue to be dominated by these sectors. The zinc mining and refining industries are relatively fragmented, with the top five producers contributing only about 26% and 28%, respectively, to the world total in 2004.

13.6.2  

Zinc Demand Analysis

In 2005 global zinc consumption grew by an estimated 3.5%, to reach 10.7Mt, following on from growth of 7.3% in 2004. The area of fastest growth was China, where offtake increased by 22%, while consumption in the world’s mature economies contracted by 1.6 per cent.

Based on an outlook for industrial production and anticipated trends in the intensity of zinc consumption in coming years, it is forecast that global zinc consumption will grow at an average annual rate of 2.5% between 2006 and 2017.

There is little evidence that there will be a significant slowdown in Chinese economic growth in the near term. According to latest estimates, China accounted for around 2.7Mt of refined consumption in 2005, equivalent to just over 25% of global demand, compared to 14% in 1990. Chinese consumption is forecast to grow by 8% to 2.9 Mt in 2006 and continue to grow at an average rate of 4.3% p.a. between 2006 and 2009, slowing to 3.8% p.a. between 2009 and 2017.

The weakness of the European economy over the past few years has resulted in moribund zinc consumption growth. In 2004 Western European zinc consumption grew by a paltry 0.5% to 2.36Mt. In 2005 over-production, weak demand and the resulting low prices in the galvanized sheet and brass sectors triggered a period of production cuts and de-stocking. This, together with the generally disappointing performance of the economies of Western Europe, caused zinc demand to contract by almost 2% to 2.3Mt in 2005. It is anticipated that in 2006 Western European zinc consumption will grow by 1.6% to 2.4Mt. Longer term zinc consumption growth for Western Europe will expectedly average just 0.9%; however, for Europe as a whole it will be 1.6%, a reflection of the stronger growth in the emergent Eastern European economies.

In recent years, USA zinc consumption has been volatile. Since 1999 there have not been two consecutive years of growth. The 8% growth rate seen in 2004, which lifted consumption to 1.25Mt, was preceded by a 6% contraction and succeeded by a 2% contraction that took USA consumption to 1.2Mt in 2005. It is anticipated that USA zinc demand will recover in 2006 and that growth of 2.7% will lift USA zinc consumption to 1.25Mt. Annual consumption growth is forecast to remain strong at an average of 2.1% for the longer term.

13.6.3  

Zinc Supply Analysis

Over the most recent zinc price cycle (1993 to 2002) global mine production grew by an average trend growth rate of 3.6%, lifting output from 6.63 Mtpa in 1993 to 9.1Mtpa in 2002. Growth was particularly strong in China where it grew by an average of 10% per annum Average growth in the rest of the world was 2.4% p.a. over the same period. In 2005 global zinc mine production had grown to 9.95Mt per annum.

Given the current and forecast high zinc price environment, it is forecast that output from existing mines and committed projects (production capability) will grow steadily over the next four years to peak at 11.64Mtpa in 2008. Production capability will subsequently decline to 11.2Mtpa by 2010 and no more than 7.5Mtpa by 2017. To offset forecast mine closures and to meet rising demand for concentrate there is a requirement for additional mine output of 2.1Mtpa in 2010 rising to 7.5Mtpa in 2017, which will be met from expansions, mine life extensions and new mine projects.

Mine production growth is forecast to average 3.3% p.a. from 2002 to 2012 and 3.2% p.a. from 2006 to 2017.

During the 1993 to 2002 price cycle, global average smelter production trend growth was 3.3% p.a., lifting output from 7.21Mtpa in 1993 to 9.67Mtpa in 2002. China’s smelter production grew at an average rate of 10% p.a., initially driven by Government edict and then by the liberalised private sector. By 2001 Chinese smelter demand outstripped the production capability of its domestic mines and the country became a significant importer of zinc concentrates. In the rest of the world output grew at an average rate of 1.6% p.a., increasing from 6.4Mtpa in 1993 to 7.5Mtpa in 2002.

The growth in Chinese smelter capacity has contributed to an excess of smelter capacity compared to the supply of concentrate. As a consequence, it is estimated that over the next two years actual smelter output will be some 0.15Mtpa below the global capability forecast. In 2007 there will be the need to reactivate some of the idled capacity but it is only from 2008 that the market will require new capacity over and above that included in the base case capability forecast. In 2008, this is estimated to be 0.5Mtpa rising to 2.65Mtpa by 2017.

13.6.4  

Zinc Market Balance and Price Forecasts

The restriction on refined metal output stemming from a tight concentrate market and ongoing positive demand, delivered a substantial deficit of 510kt in 2005. This situation will continue to prevail for the next two years with an annual deficit of 400kt forecast for 2006 and a balanced market for 2007. Overall implied stocks will be drawn down to critical levels of about fifty days equivalent in 2006 and even lower than that in 2007. Stock days approaching forty-five days are considered to represent extremely tight conditions. It is likely that visible LME stocks will be reduced to less than five-days equivalent sometime in 2006 and below that in 2007. The market is forecast to return to surplus in 2008 but even then, low inventory levels will continue to provide support for a relatively high zinc price in that year.

However, zinc prices are already at record levels, and it is argued that they have become dislocated from market fundamentals owing to the weight of new money that is entering commodity markets from sources such as pension funds. For the prevailing market conditions, it is judged that a price somewhere between USD1500/t and USD1700/t can be justified from a fundamental and historical perspective. As such, the speculative activity on the London Metal Exchange means that forecasting the zinc price for the near term is now moving into uncharted waters.

Annual average prices of USD2157/t and USD2235/t is forecast for 2006 and 2007 respectively. High prices will encourage investment in new mine production and by 2008 the market is foreseen to move to surplus and to remain in surplus for the following three years. Prices over this period will ease, falling to a low of USD1,121/t (nominal) in 2012. The subsequent peak is expected in 2016. In 2006USD terms, the average real long-term price in the period after 2017 is expected to be some USD1125t.

The extremely tight market conditions in the concentrate market are anticipated to last until 2008, after which greater balance will expectedly be achieved. The low base TCs that is currently being experienced is, therefore, foreseen to persist and to worsen during this time. However, due to the price participation mechanism, the high zinc prices forecast for this period will compensate for the low base TC levels. In the longer term a more balanced concentrate market is anticipated.