COMMENTARY — A near-hopeless zinc situation

Despite the many closures that have already occurred, zinc fundamentals continue to be characterized by gross oversupply.

We are concerned that producers are still deciding to increase output and reduce unit costs in order to cope with the low prices.

Zinc has sped across the spectrum, from being the “managed” metal to being the most “unmanaged” metal.

In the past, the gaps between supply and demand were never far apart. Supply appeared to follow demand with remarkable precision. Today, however, when the supply-demand gaps in the zinc market are compared with any other metal market, the sorry state of zinc is all to evident.

It was an unspoken belief among financial analysts that the alliance among the zinc giants of the Western world — Teck, Cominco, MIM of Australia, Asarco, Metallgesellschaft and Metall — prevented supply from ever straying too far from a balanced position. These producers never had to collude; they simply had faith that each would act responsibly.

However, zinc supply has soared and the alliance is in disarray. The inter-ownership among zinc producers is rapidly dissolving, furthered no doubt by the financial pain at Metallgesellschaft. The aforementioned unspoken belief is no longer our quiet mantra. The spell has been broken, perhaps permanently.

Zinc inventories, both in absolute terms and in a ratio to demand, currently exceed any level in our database records, which start in 1977. Adding to our concerns is the current willingness of producers to continue seeking opportunities to expand output and reduce unit costs.

Supply still exceeds demand and unless zinc prices collapse (which is not an impossibility), the situation is nowhere near a resolution.

Zinc’s struggle to recover looks as if it will be a long, painful process. Even if supply and demand were well balanced (a mighty big “if”), inventories are so high that it would take many years to work them down. No economic scenario imaginable could allow demand to rise at a fast enough rate to consume this colossal mountain of metal.

We consider zinc to be the metal which currently has the poorest fundamentals in the base metal family, yet the rest of the family doesn’t look healthy today either.

— From a recent “Mining Research” publication. The author is Julian Baldry of the securities firm Nesbitt Thomson.