chinese zinc deposits part ii, page-4

re: chinese zinc deposits part ii jharmann I think the most important thing to influence zinc prices is Chinese production.

New production from their biggest deposit and miner has only grown 120,000t to 200,000t from 80,000t.

A conservative estimate of consumption/demand increases for 2006 is 300,000t.

For 2007 it is 330,000t.

So the increase in new production required for 06/07 to meet consumption is 660,000t and their biggest miner has only managed to increase production by 120,000t..

The unknown in the equation is how much the other miners will produce but given they aren't touching their second largest deposit for 5 yrs at least...we must be left with much smaller contributions from various sources...so I feel pretty comfortable that it will be difficult for them to find sources of signifiant new supply...in a short timeframe...

Rueters agree with me...

http://today.reuters.co.uk/news/articleinvesting.aspx?type=economicIndicatorsNews&storyID=2006-10-12T101414Z_01_L12867451_RTRIDST_0_METALS-BASE-OUTLOOK.XML&WTmodLoc=Business-C5-Economics-2

China to buoy base metals over next year -analysts
Thu Oct 12, 2006 11:17 AM BST143
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By Pratima Desai

LONDON, Oct 12 (Reuters) - Strong economic growth and rising infrastructure spending in China will boost prices of base metals such as copper, zinc and nickel and possibly push them back towards recent highs before the end of next year.

Metals analysts at banks and trading houses have compiled their base metals outlooks for the London Metal Exchange's annual event of seminars and dinners this week.

The influx of new investment money, with more to come as pension funds continue to diversify their assets away from stocks -- mostly to indices which buy and hold commodity futures -- is also likely to buoy prices.

Demand for base metals will still to an extent rely on growth in the United States, where growth is expected to slow rather than slump, but much more now hinges on China which is increasing its dominance of the market.

China is a producer and a consumer. But plans to build new houses and offices and expand its rail network over the next few years are likely to mean high imports of base metals.

Forecasts of Chinese economic growth have in recent years consistently erred on the side of caution and the chances are that next year will be no different.

"With supply-side capacity increases constrained, the near-to-medium-term performance of commodity prices hinges on the demand side," ABN AMRO said in a research note.

"If China continues to surprise on the upside, as it has in the past, there is potential upside to our ... price forecasts."

CATCH-UP

Metals analysts, too, have underestimated the strength of the market in recent years. Partly because they were not able to price-in new money coming to the market and partly because their forecasts of demand from emerging market countries were too low.

In any case, despite their pessimism, copper hit a record high of $8,800 a tonne this year, nickel $30,250 a tonne and zinc $3,970 a tonne.

"Economic growth in China is likely to remain high and very metals-intensive in 2007," Merrill Lynch said in a research note.

"Base metals markets have become overly concerned about a slowdown in global economic growth."

Fears that the global economy led by the United States could be heading for a hard landing have hit prices since May. Copper is now around $7,500 a tonne, nickel at $30,000 a tonne and zinc at $3,750 a tonne.

Analysts think the worry is overdone and that global growth will remain firm even if U.S. consumer spending slows significantly over coming months.

Tight supplies and output disruptions due to upcoming wage negotiations remain a theme with zinc and nickel inventories at London Metal Exchange registered warehouses at 133,225 tonnes and 4,986 tonnes respectively, their lowest since 1991.

Copper stocks have risen to around 114,000 tonnes from below 30,000 tonnes in July 2005, but are well below the more than 980,000 tonnes amassed in May 2002.

China's State Reserve Bureau selling copper in recent months has dampened prices and the country's imports.

But that is expected to change.

"Expect to see a period of catch-up over the remaining months of the year...Copper demand and imports should recover and surge higher during this period," Standard Bank said in a research note.

"Long term, Chinese demand for all base metals is set to remain strong underpinning tightness."

One other thing to note is the rising cost of production.

New rules and regulations, higher wages and energy costs and rising costs of exploration in many politically unstable regions around the world have all contributed to the rising floor under base metals prices.

"A move up in long-term metals demand growth rates, plus rising costs of production means that consumers will have to get used to long-term average prices for most industrial metals that will be a lot higher than in the past," Barclays Capital said in a research note.