zinc producers set to fly

Zinc Market Overview



Zinc is significant to investors as it is an important component in many silver deposits. The potential value of those silver deposits depends heavily on the outlook for the zinc market.
Zinc is one of the most important of the base metals, with an essential role in a wide range of industrial and consumer products.

Like the other base metals, zinc is just recovering from a period of low prices. Zinc was hit especially hard, as two big new zinc mines came into production just as China was ramping up exports and the western world was headed into recession. The substantial oversupply of metal pushed the zinc price down to a level not seen for at least a decade.

During that period of low prices, little was done to develop new sources of supply. Existing mines are being steadily depleted, with some major mines due to be shut down over the next few years.

Demand for the metal is growing steadily as the western world once again experiences economic growth. At the same time, the rapid economic growth in China has made that country the biggest user of zinc. China has recently gone from a zinc supplier to a net importer. That reversal has enormous implications for the zinc market.



Consumption Is Growing Steadily

Only iron, aluminum and copper are used more extensively than zinc. The biggest single use of zinc is for galvanized steel. A thin coating on steel products makes the steel resistant to rust and corrosion, and thereby greatly extends the life of the product. Today, nearly all cars in the western world are made with galvanized steel. Importantly, more and more cars in most other parts of the world are also being galvanized. Galvanized steel is also used extensively in construction and many other applications. Zinc is also used for die-cast components, from door handles and carburetors on cars, to children's toy cars, and thousands of other products such as casings for electronic components. Zinc is also alloyed with copper to make brass which is used in a vast array of products.

The multitude of other uses of zinc includes sun screens, phosphors on TV screens, fireworks, paints, cosmetics and plastics. That rapidly growing list of applications is steadily adding to the importance of zinc in the industrial world.

Consumption rose at an average of about 3% per annum for a decade before the 3.6% decline in 2001. Presently, the world consumes about 7.5 million tonnes (16 billion pounds) per annum of zinc.

Economic recovery in the West and the phenomenal growth in China and other parts of Asia is pushing the growth in consumption back to or above the long-term growth trend. As a result, the mining industry needs to bring on about 225,000 tonnes of new capacity each year simply to satisfy the growth in demand.



Developing Enough Supply Will Be A Challenge

In addition to the 225,000 tonnes of new capacity required to meet the growing demand for zinc, the mining industry must also find and develop new mines to replace depleting mines.

Present projections show that about half of today’s production will be depleted within the next decade. The zinc industry is highly fractured, with 266 mines in production. Fewer than 20 of those mines produce more than 100,000 tonnes per annum, a level that would be of interest to a major. Many of the smaller mines are in China, and are facing growing challenges to meet more stringent environmental and safety standards.

After the start up about four years ago of Antamina (280,000 tonnes per annum) and Century (600,000 tonnes per annum), little has been done to increase productive capacity in the western world.

During the period of low zinc prices, producers struggled to stay in business, with exploration for new deposits seen as an unnecessary luxury. In fact, not all of the producers survived, as Pasminco, one of the biggest producers, went bankrupt in September 2001.

Over the next few years, the mining industry will need to bring on two new 100,000-tonne-per-year mines each year to meet the growth in demand plus another couple of big new mines each year to replace depleting mines.



The Investment Case For Zinc

Demand for zinc is expected to continue to rise steadily, with the biggest portion of the increase coming from the rapidly growing economies of China and India. Even as demand grows, existing production will decline as mines are depleted. As a result, new mines are required to satisfy the market.

Raising the capital to develop new mines will require sustained strength in the zinc price at a level above the current $0.45 a pound. Conversely, if new capacity is not brought on, the price will move well beyond that level as supply shortages develop.

In summary, the zinc price should remain at or near the present level at least through a mine development cycle – two to three years, or longer