EDITORIAL & OPINION – COMMENTARY — Zinc price tied to Asian recovery

The West has yet to feel the impact of the Asian economic crisis upon zinc demand. However, falls in capacity utilization rates and increasing stock levels (normal signals of a contraction in industry activity) are expected in mid-1999. Prices are already beginning to reflect such a contraction, though, for the current year, they are unlikely to fall below the low levels that existed in late 1998.

In 1998, zinc averaged US$1,027 per tonne (46.6 cents per lb.), and will hold at the US$1,000 level in real terms (45.4 cents per lb.) through 2000. Zinc prices will not start recovering until 2001, when they will accelerate rapidly as Asian growth returns. Zinc prices will rise some 12% — to US$1,150 per tonne, (US52.2 cents per lb.) in real terms — by 2008.

Falls in Asian consumption will be combined with a leveling of end-use physical demand in both the U.S. and Europe through 2001. In the U.S., new capital formation will flatten as capacity utilization rates fall. This is part of a normal business cycle. European demand will subside as governments postpone infrastructure development. Institutional reform will also slow, particularly regarding labor structuring. As a net result, economic growth will be moderate across the region. All of this will combine with the spreading impact of the Asian and South American crises, and zinc capacity utilization rates will fall.

Asian recovery will intensify after 2000 in spite of slow institutional reform. Infrastructure development and motor car demand will gather pace as regional funding stabilizes and confidence returns. Asia and Latin America will constitute the most forceful vectors of metal growth.

Zinc-coated steel will at least hold its own as a motor vehicle manufacturing material through to 2008, in spite of intense competition by non-galvanized materials for increased market share. We expect zinc demand to grow by an average of 2.1%, to 9.4 million tonnes per year, by 2008.

In both 1999 and 2000, zinc mine capacity will grow by about 7.5%, thanks largely to three major developments. Zinc production at the Red Dog mine in Alaska was expanded by 175,000 tonnes per year during 1998. Towards the latter part of 1999, the major Century project in Australia (eventually to contribute 450,000 tonnes per year) and Lisheen in Ireland (160,000 tonnes per year) are both scheduled to start up.

At present, 60% of world zinc mine capacity is to be found in just five countries: China, at 1,194 tonnes in 1998; Australia, at 1,120 tonnes; Canada, at 1,171 tonnes; Peru, at 949 tonnes; and the U.S., at 714 tonnes. This dominance was at a peak in 1996, and will be maintained until 2001. Thereafter, a number of famous mines will be closing as reserves are exhausted.

This will be most pronounced in Canada, where the Polaris, Sullivan, Heath Steele, Isle Dieu, Hudson Bay (Flin Flon and Ruttan), Selbaie, Myra Falls and Matagami mines are destined to disappear from the schedule. The Brunswick mine in Nova Scotia will be left to carry the flag, and the only major addition to capacity on the horizon is the rather doubtful reopening of Faro and its satellite, Vangorda. From being the world’s largest producer of zinc last year, Canada was overtaken by China in 1998 and is expected to slip to fifth place by 2005.

In Australia, the famous Broken Hill (Pasminco) and Mount Isa (MIM) orebodies are also nearing the end of their lives, but probably not until 2007 and 2004, respectively. Hellyer (Western Metals) will be exhausted by 2003. Nearer at hand, Australia’s zinc capacity is receiving a massive boost from the opening of the Century and Pillara (Lennard Shelf) mines. These developments will boost Australia into first place as a zinc producer by 2001, a position it will lose to China towards the end of the decade.

Taking North America as a whole, zinc mine capacity is set to increase — despite Canada’s problems — as a result of the expansion the Red Dog mine (the world’s largest producer) and development at Rio Algom’s Nicolet in the U.S. and Pe-oles’ Francisco I Madero in Mexico.

Peru is the world’s fourth-largest zinc producer, and its position will be consolidated by the large Antamina development of Rio Algom, Noranda and Teck.

Elsewhere in the world, production at three other large zinc projects is looming. Lisheen, owned by Ivernia West & Minorco in Ireland, is due to begin producing in September 1999. The other two mines, both of which are in southern Africa, depend on innovative technology. At the Gamsberg deposit in South Africa, Anglo American plans to build a mine-smelter-refinery complex capable of producing 200,000 tonnes per year. In neighboring Namibia, the Skorpion project, part of which is owned by Anglo American, could be almost as big.

— The preceding is summarized from a recent report by Australian-based AME Minerals Economics.