Metals Report Zinc’s decline may be overdone

Zinc prices have been a veritable roller coaster this year moving to extremes on both the upside and downside.

Overeaction seems to be the byword for this important industrial metal as prices swing down, then up, then down again. The volatility of zinc prices in 1986, in percentage terms, is only surpassed by platinum.

In a commodity market that is characterized by producers’ close control over supply — as least in comparison to other major metals — the recent swells and troughs of the market are remarkable.

The reason for the large swings are largely a result of the delicate balance between supply and demand in zinc markets. A slight disruption in supply sends prices soaring: the prospect of reduced demand drags prices down.

While there is some unused zinc production capacity that could come onstream as prices improve, that market overhang doesn’t compare to copper, lead or tin. For those metals, any strengthening of prices brings the reopening of shut-down mines, increasing supply and effectively capping whatever price rally had prompted their reopening.

But with the Cyprus Anvil mine starting to ship concentrates and Australian production likely to pick up in 1987, oversupply could become a factor, further dampening prices.

Cominco’s official announcement to put its Red Dog zinc deposit into production by 1991 is another threat to the balance of supply and demand although the mine won’t be a factor for at least five years. Red Dog will be the largest, lowest-cost zinc mine in the Western World.

When zinc prices slumped to a fourth-quarter average of less than 29 cents in 1985, things looked pretty glum for zinc miners. In January the price went even lower bottoming out at 28.2 cents

After the first quarter, however, things began to brighten. Prices over the summer strengthened moving over 41 cents by mid-October, a 45% gain from January’s low.

That price increase was largely due to labor problems at Australia’s Broken Hill zinc-lead mining area in the spring and at Noranda’s Canadian Electrolytic Zinc refinery in Quebec during the summer.

Both those situations have been resolved (although the Australian resolution may only have been temporary). As a result, prices started a deep decline again. Less than a month after climbing above 41 cents , prices fell to 36 cents in late November and reached 32 cents Dec 2, a 22% decline from the October high.

Those kinds of price swings may be fun for speculators, but for producers they’re kind of scary.

The problems of low prices are obvious: insufficient revenue from sales to generate a profit. Not so obvious is the problem of higher prices.

While zinc prices of 40-45 cents would be welcome throughout the industry, if zinc prices improved beyond that zinc would be begin to lose its markets to substitutes such as plastics in the automotive industry.

Ray Goldie at Richardson Greenshields predicts a surplus in zinc production in 1987. For the first nine months of 1986, production has been less than consumption, probably one of the reasons for the strong price in the two middle quarters of the year.

In the fourth quarter, however, that balance could shift and Mr Goldie expects the overall supply- demand balance in 1987, barring labor disruptions, to be a surplus of about 100,000 tonnes.

That surplus will translate into an average 1987 price of less than 39 cents , he says.

Other analysts are likewise calling for a slight surplus of supply over demand in 1987 and predicting prices of about 34-35 cents per pound, on average, over 1987.

That kind of price won’t make zinc producers like Cominco, Noranda and Falconbridge stand up and cheer, but they could probably live with a price in the high 30 cents range.

What would probalby be most welcome, however, is a more stable zinc price. It’s difficult to plan ahead when prices fluctuate as widely as they have over the past 12 months.

Experience, however, gives little cause to hope for such stability. Producers will likely have to live with volatile zinc prices for the forseeable future.