From Mining News: EVERYONE suffers in a war but in a trade war...

From Mining News:

EVERYONE suffers in a war but in a trade war some metals suffer more than others, with zinc the base metal being hit hardest.

The problem of being heavily exposed to steel, where 60% of the world's zinc is consumed as a steel galvanising agent to inhibit rusting, means that any decline in demand for galvanised steel flows directly into demand for zinc.
In the increasingly bitter exchange of tit-for-tat tariff increases between the US and China it is steel which has become a weapon, crimping demand growth.
But the real problem for zinc lies in the fact that demand had already been slowing before the first shots were fired in the trade war with pressure on the price being compounded by increasing supply from old mines re-starting and new mines being developed.
The net effect is a squeeze that has knocked 25% off the zinc price over the past six months and with further falls expected over the next few years as a shortage of metal gives way to several years of high and rising surpluses.
Demand side first, because a subtle shift in the type of steel being produced has been detected by analysts at Credit Suisse, an investment bank, which noted a rise in the global output of carbon steel used in structural beams and fabrication and a significant fall in demand for galvanised steel which is mainly used in an open-air environment, such as roofing.
"Demand has been a weak point this year, perhaps driven by the escalation in trade disputes, and can be seen in [slowing rates of] galvanised production growth," Credit Suisse said in its latest price forecasts for zinc and lead.
Five days after those comments about weakening demand for galvanised steel one of Australia's largest zinc projects, the re-developed Century mine, unveiled a funding deal for a second stage designed to double output even as the first stage ramps up.
Once the world's biggest zinc mine, Century was mothballed several years ago when the zinc price was low and despite the original owner, Chinese-controlled MMG, having a large stockpile of relatively high-grade tailings, and potential access to undeveloped parts of the orebody.
Enter the ambitious New Century Resources which acquired the mine and its surrounding tenements early last year in a complex deal that saw MMG continue to fund rehabilitation work while New Century focussed on re-starting production.
At the time of the acquisition the zinc price was around US$1.20 a pound, having climbed from a low of 65c/lb and on its way to a multi-year high of $1.65/lb earlier this year.
Today, zinc is back to around $1.09/lb, below New Century's acquisition price and perhaps heading for the long-term price of $1.04/lb used by Credit Suisse in its latest report into the zinc and lead markets.
At the latest zinc price, the re-developed Century mine should still be handsomely profitable thanks to a forecast C1 cash cost of 38c/lb and a C3 cash cost of 50c/lb used in a presentation to North American investors in June.
So confident is New Century that earlier this week it secured a A$40 million debt facility from National Australia Bank to expand annual ore processing capacity from 8 million tonnes per annum year to 15Mtpa. With the expansion, zinc metal output (in concentrate) should effectively double from the feasibility study target of 264,000tpa.
The challenge of introducing around 500,000t of zinc from the re-commissioned Century mine is exactly the point made by Credit Suisse which sees "compounding surpluses on the way" for zinc.
"Looking forward it is hard to see anything but increasing surpluses as the onset of ex-China (outside China) mine supply outweighs demand," the bank said.
"While there are some factors suggesting the market may remain tight in the short term, we continue to expect the overall price trajectory to trend down towards our long-term price of US$1.04/lb."
Interestingly, Credit Suisse is behind the latest market decline with its price tip for the final quarter of the year being $1.18/lb, which is higher than the latest price London Metal Exchange quote of $1.12/lb.
However, in the first quarter of 2019 the brank reckons the price will have settled around $1.09/lb, before dropping to its long-term price of $1.04/lb.
Today's issues with zinc are identical to those which saw the metal soar to more than $2/lb in 2008 before crashing to less than 50c/lb in 2009 - over-supply and under-demand.
From next year a shortage of zinc will morph into a surplus of around 132,000t according to Credit Suisse, growing to a surplus of 611,000t in 2020 and 877,000t in 2021.
"Demand growth is flagging," the bank said. It estimated world consumption of zinc this year will only be 1.4% higher than last year whereas mine output will be up 4.7% and refined zinc production will be up by 3.4%.
Next year the gap widens with mine output up 8.6% and consumption rising by 2.3% - a difference which will boost stockpiles and lower the price.