zinc inventories at critical levels

Zinc promise

Then there's zinc.

Zinc prices trade around $3,500 per metric ton on the London Metal Exchange. That's down from more than $4,500 in December of last year but two years ago, they were trading below $1,500.

"Zinc inventories are at critically low levels now," said Pinkowski.

Back in December, experts pointed out a supply deficit for 2006 as well as a price rise of almost 270% between 2004's spot prices for high-grade zinc and the mid-December 2006 level of around $4,400.

"Demand for the metal, used to galvanize steel, is growing as world demand is expected to exceed supply this year by 20,000 tons, according to an analyst at Economic Intelligence Unit," said Thomas Winmill, portfolio manager of the Midas Fund.

Winmill also points out that the EIU predicts that world demand for zinc will rise to 4% this year, from 3.7% in 2006.

Zinc prices climbed 4.5% last week, likely because investors became concerned about falling LME inventories, he said. Zinc inventories fell to 69,350 metric tons -- that's their lowest level in 16 years and 65.9% lower than inventories from a year ago, according to Winmill.

"Just three years ago, inventories were over 10 times greater than they are today," he said.

Zinc has "lots of upside potential over the next coupe of months," said Selwyn Resources' and Yukon Zinc's Meade.

After that, the market may see some new production that will lead to a modest surplus and moderating prices until about 2010, he said. That's when "numerous large mines are depleted and then a very significant supply gap develops."

"There are only a couple of large zinc deposits known in the world that have any hope of filling the major gap that begins in 2010 and accelerates in 2012 when the Century mine in Australia runs out of ore," Meade said. Yukon Zinc is currently in the midst of financing the Wolverine project in Canada, a zinc-copper-lead-silver-gold deposit.


Nickel and zinc prices have dropped from their recent peaks, but the future for both points to strong demand and short supplies, say experts. Copper, tin and lead have potential as well.

"The long-term story for the base metals remains the same: Demand for metals continues to increase steadily," said Lawrence Roulston, editor of Resources Opportunities. Meanwhile, "production growth is constrained by the long lead times to develop new production and by the shortage of high-quality development projects."

And "demand for base metals is incredible," said Phil Flynn, a senior analyst at Alaron Trading. "Scraps are as good as gold."

"All metals have small inventories, which means any supply disruption can lead to a price bump," said Dr. Harlan Meade, president and chief executive officer of both Selwyn Resources Ltd.

Base metals are even likely to find support from the rally in oil prices, "since the principle in economics is simply supply/demand fundamentals," according to Cary Pinkowski, chief executive officer of Vancouver.

He said 15% to 20% of all mining costs are related to fuel and "costs will move higher for all mining projects, causing the prices to increase here."

"Any [base metal] pullback is an opportunity to buy a stock or negotiate aggressively for a property," said Pinkowski, whose company focuses, in part, on evaluating mining projects.

Nickel charm

That said, nickel's looking good in the long term.
Prices already dropped to about $32,000 per metric ton recently from a peak of around $54,000 per metric ton in May, according to LME data.

"Nickel is getting to look like a bargain now," said James Finch, senior editor at StockInterview.com. "The metal has lost all its gains for 2007 and has retreated to November 2006 levels."

"Nickel bulls capitulated and the nosedive appears likely to reverse over the next few months," he said.

"The Chinese haven't stopped using nickel [and] the government may soon nullify its export tax rebate on steel products. If this occurs, stainless-steel pricing could firm and then rebound in the fourth quarter and into 2008," he said. "This would help nickel rebound."
And the "negative sentiment" for nickel has "shifted too far, too fast," Pinkowski said.

He said a rule change on the LME was partly to blame for the decline in nickel prices.

The LME implemented new rules aimed at preventing collusion between dominant players, and there's a threshold at which long positions are required to lend to the rest of the market, he explained.

"The rules are meant to tighten leasing of the metal, forcing hoarders to lend," he said. "This extra supply has seen the warehouse supply almost double in the last six weeks."

But looking further ahead, the world economy's demand for stainless steel will drive nickel demand, he said. And not just in Asia. Pinkowski expects the hybrid car market to grow significantly.

Also, take a look at how much investment bankers have been wrong in the past few years, he said. They are counting on some very large nickel laterite projects coming on stream over the next few years. Laterite is defined as a red soil produced in rock decay.

Those types of projects are "much more expensive and challenging," Pinkowski said. "This perceived supply may not be as great as people think it will be."


The world's largest producer of nickel, plans to spend around $1 billion in its facilities in the Kola Peninsula in Russia by the year 2020.
That confirms what Norilsk "may portend for the nickel price," said Finch.