Zinc market facing an oversupply; lead benefiting from tight

A better year is forecast by Shearson Lehman Brothers for lead than for zinc.

In its Annual Review of the World Lead & Zinc Industries 1987, Shearson says the zinc market is fundamentally oversupplied, and while a small surplus is projected for 1988, the trend is toward a condition of oversupply which will worsen in 1989. A downward drift in the price of the metal is predicted.

The lead market, on the other hand, will reap the benefits of a stronger 1987 price and continue to build up its stocks. The current inventory, Shearson says, is tight and stocks should remain low by historical standards throughout the year. Zinc market disruptions

Supply disruptions, primarily industrial disputes, have had an important impact on the zinc market the past two years, Shearson says, pointing to the disputes at Noranda in 1986 and Cominco in 1987. Also, at Kidd Creek, technical problems were experienced last year.

Shearson foresees the zinc market returning to surplus this year after six years of deficit. Consumption will grow modestly to almost five million tonnes, primarily spurred by its use in galvanized steel. The improvement, however, will likely be outstripped by the rise in non-Communist refined zinc production.

On the labor front, fewer worker contracts will come up for renewal this year, thus lessening any impact by such disputes on production.

“When higher levels of output, in South Korea in particular, are taken into account production should exceed 5 million tonnes for the first time, leaving the market oversupplied by an estimated 30,000 tonnes,” Shearson says. “Therefore, prices are likely to drift from current levels to below $800(US) per tonne. The surplus is not large enough to cause a freefall, however.”

Key factors affecting mine output include the following:

* Latin American concentrate output should increase in the coming years, assuming Peru and Mexico resolve the worst of their industrial/technical problems, together with continued expansion in Brazil.

* In Canada, output should recover to a record 1.33 million tonnes thanks to the Winston Lake and Caribou mines coming on stream.

* The only areas of major contraction to the end of the decade are expected to be in western Europe with the likely closure of Bad Grund, Rammelsberg and Black Angel, and in South Africa with the closure of Prieska.

New capacity and expansions of existing operations will outweigh the few closures listed above, and non-Socialist mine production should reach an all-time high of 5.2 million tonnes in 1988 and 5.26 million tonnes in 1989, Shearson forecasts.

Zinc consumption, Shearson points out, has risen every year since 1981, averaging 1.9% annually. Galvanizing is expected to give zinc consumption a boost in the coming years.

The European producer price has been running of late at $860, a price level which is not expected to be maintained. Shearson’s “best estimate” of an average price in 1988 is $810 (trading in a price range of $770-$850), with prices ending the year on a weaker note compared with January. Higher lead output

As for lead, improved production levels are forecast for 1988-89 and this output, coupled with relatively weak demand trends, should push the market back into balance and then oversupply, Shearson predicts.

The surplus is not expected to be large, however, and inventory levels are expected to remain low by historical standards for some time. Limited downward pressure on the price is forecast.

The past two years have not been banner years for non-Communist lead production. (The Cominco strike in 1987 was one factor in the lower output.) An improvement is foreseen for 1988, with non-Communist primary refined production expected to total 2.31 million tonnes.

On the consumption side, lead appears not to have been hit as severely as other metals by declining metal usage and substitution. No viable substitute, Shearson says, has been found for the lead-acid battery used in motor vehicles, and the number of such vehicles (and hence the demand for replacement batteries) has grown steadily around the globe over the years (although that trend may be about to change).

Demand for lead is expected to stagnate this year and in 1989, with secondary production at high levels and primary output on a gentle rise, Shearson says the market is expected to move back into balance and then into modest oversupply.

Interestingly, the producer price for lead in the U.S. in 1987 was well above the lme price. At 42 cents per lb in the U.S. for most of the latter half of 1987, lead recently slipped to 38 cents in that country.

Shearson is forecasting an average London price for lead in 1988 of 27 cents , about the same as the 1987 average.