Higher zinc prices in 2011, says Bank of America Merrill Lynch

After languishing since 2007, demand for zinc is set to rebound over the next year and particularly in 2011 as the steel industry improves, analysts at Bank of America Merrill Lynch forecast in a February research report.

Galvanized steel producers, which make up about 50% of the global demand for zinc, are recovering, the bank’s analysts argue, and steel mills in China and other parts of the world registered gradual increases in output last year. With current stocks of galvanized steel still quite low, there’s also scope for restocking and underlying demand is set to grow as the economy stabilizes.

“Even though the recent economic data highlight that the unfolding economic recovery is somewhat uneven…we believe that there are signals that the global economy will expand in 2010, which should support galvanisers and therefore zinc demand,” the report maintains.

In the fourth quarter of 2009, output of galvanized steel increased 20.3% year-on-year and 6.7% from the third quarter.

The bank estimates that zinc consumption could rise by between 9.3% and 12.5% in 2010 and by 4% in 2011.

While demand is likely to rise, however, the report estimates that mine output increases this year could temper prices. Zinc supply is forecast to go up by about 1.1 million tonnes – “easily making up for last year’s production losses.”

As a result, there will be limited upside to prices this year, which are anticipated to reach about US$2,125 per tonne or 96¢ per lb., slightly above current levels.

In 2011, however, those prices are set to rise to US$2.750per tonne or US$1.25 per lb. as mine production constrains refined zinc output in the medium term. “Concentrates supply is set to constrain refined zinc production, helping to push the market into deficit by 2011,” the report states.