Zinifex-Oxiana merger's impact on zinc market minor: analysts...

Zinifex-Oxiana merger's impact on zinc market minor: analysts

Washington (Platts)--19Jun2008
This week's merger between Australian zinc miner Zinifex and copper/zinc
producer Oxiana created the world's second largest zinc producer, OZ Minerals,
but while such mega-mergers put zinc production in the hands of fewer players,
the base metal's price slump will remain largely unaffected due to the
peculiarities of the zinc market, said analysts.

The new A$9 billion ($8.5 billion), Melbourne-based mining giant, up for
court approval Friday, has four operations in Australia and Asia and another
three sites in development. OZ will control roughly 6% of global zinc
production, and combined output from Zinifex's Century and Rosebery mines and
Oxiana's Golden Grove mine could reach 746,000 mt in 2009, analysts
estimate.

Still, "the question would be whether [OZ management] would be
disciplined enough to shut down some of its operations that may be higher-
cost, which would help tighten up the market," Kerry Smith, a mining analyst
with Toronto, Ontario-based Haywood Securities, told Platts. "I've just never
seen that in the zinc business [but] that would bring the market back into
balance."

Zinc prices have plunged over the past two years to roughly 85 cents/lb
from a high of $2/lb.

As consolidations reduce the field to only a handful of major players,
the impact on the market is more likely to be stronger, Smith said. For
example, in the iron-ore business, three players control most of the market,
so there's a greater likelihood that those companies would take some of their
higher-cost production out of the market for a time until supply and demand
are back in sync, he said.

In contrast, zinc production is still more scattered among a number of
companies, with the biggest producer, Xstrata -- which produces about 800,000
mt/year of zinc -- controlling only about 7% of a market that is expected to
reach 12 million mt this year, he said. "In the zinc market, you never see
much producer discipline. If prices come down and mines start losing money,
you don't often see [companies] shutting down production because nobody
follows suit," Smith said. Instead, other competitors rush in to take up the
slack, he said.

What's more, a company with a profit-draining mine still faces costs
associated with a shutdown, such as holding costs, environmental expenses and
worker severance pay. "So even if the mine is losing a little money, it's
sometimes better to keep operating then to shutdown due to these costs," Smith
added.
John F. Hughes, a mining analyst with Quebec-based DesJardins Securities,
agreed the the Zinifex-Oxiana merger's ripple will be minor. "The zinc market
is still reasonably diverse," he told Platts. And "ultimately, who cares if
you control production if you can't control prices?" While the birth of OZ
Minerals puts more pricing power in the hands of the zinc producers, it
remains unclear how much these companies can "control their own price
destiny," Hughes said.

--Laura Gilcrest, [email protected]