The price of zinc hit a 10-year high on Wednesday as the industrial metal continues its steep climb following supply cuts from mining companies and continued strong demand out of China.
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Analysts predict further gains, but that depends on whether producers, in particular Glencore PLC, will take advantage of the appreciation in value of this metal and quickly ramp up production.
Since mid-June, London Metal Exchange three-month zinc futures have gained more than 24%, and were recently trading at $3,081 a metric ton. That is their highest level since October 2007.
Zinc is the lightweight, rustproof metal used in the car and construction industries, and its rising costs can translate into higher auto and steel prices. The metal's fortunes have turned from its January 2016 low, after which mining companies cut back the production glut that had sent its price down some 66% from a 2006 peak.
Global copper and aluminum production figures for June were 23% and 35% higher than they were six years earlier, around when prices started to drop, according to figures provided by ING. Zinc production has lagged behind, growing only 3.4% in June.
"If you were to try and rank base metals as to where they are in terms of the cycle, I'd say zinc is more advanced in terms of seeing supply constraints," said Robin Bhar, Société Générale's head of metals research. "Mines starting up won't yield results overnight and there'll be a lag until they do," he added.
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Prices are getting a further boost from a seasonal third-quarter uptick in China's steel industry. Zinc is used to coat steel to stop it from rusting. Production from the Chinese automotive sector, though weaker than last year, has helped zinc demand, while China's better-than-expected second-quarter gross domestic production growth of 6.9% has boosted metals across the board, S&P Global said in a recent report.
Investors and analysts are betting that prices will move higher still. Wood Mackenzie, a commodities-industry consultancy, estimates prices averaging $3,500 a ton between 2018 and 2020. London-based brokers Marex Spectron predict Zinc will hit somewhere between $3,143 and $3,227 a ton in the short term. Vivienne Lloyd, a base-metals analyst at Macquarie Group, sees the metal staying over $3,000 a ton during the fourth quarter of this year and the first quarter of next year.
Key to the rosy outlook is a belief that mining companies will wait for a sustained period of higher prices before really boosting production and for those that do, the process may take time.
Glencore, the metal's biggest producer, will be particularly key. In October 2015, the Switzerland-based company reduced its zinc mining by 500,000 tons a year, amounting to 4% of global production. Zinc prices jumped 7% that day.
In its first-half results, released earlier this month, Glencore said it increased zinc production by 13% from the same period last year.
But in those results, Glencore also made no change to a May statement that, "there are currently no plans to restart idled capacity in Australia and Peru."
Glencore "has maintained a degree of price discipline so far, and can be expected to do so even through a ramp-up," said John Meyer, mining analyst at S.P. Angel.
Some miners have started to fire up shuttered mines and shafts.
Among those, Minerals and Metals Group's Australian Dugald River mine is on target to begin production in early 2018, adding 170,000 tons to global annual zinc supply. Vedanta Resources PLC's Gamsberg mine in South Africa will reintroduce 250,000 tons back into the market from early 2019.
"There's a whole list of what we call reactivation projects which are now on 'care and maintenance' and which could be restarted," said Chris Parker, zinc markets research director at Wood Mackenzie.
But little of this will happen this year.
Mr. Parker also calculates that this list would provide up to 250,000 tons of extra zinc a year, which "falls well short" of the 2 million tons of incremental supply needed to meet forecasts of global demand by around 2020.
Instead, tonnage from so-called green field sites, or new production, would be needed to really ramp up production, he said.
Analysts expect that Chinese supply will also be curtailed as environmental directives -- aimed at tackling water contamination from heavy-metals mining -- kick in this winter, stymieing zinc production. The country is responsible for 40% of global zinc supply.
Over a longer-term period, mining firms "are not going to simply ramp straight back up, they're going to need sustained high prices in order to do so," said Alastair Munro, a broker at Marex Spectron.
Scott Patterson contributed to this article.
Write to David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
August 16, 2017 12:29 ET (16:29 GMT)