Vedanta gambles on zinc
We draw attention to Zinc and its steady rise to a recent thirteen month high to $2,216/tonne on the 15th of July. With the metal generally one of the lesser used of the base metals, zinc last week rose due to concerns over a possible supply deficit. According to the International Lead and Zinc Study Group (ILZSG), global zinc mine production declined by 8.1% y.o.y. in the first four months of 2016 owing to reductions in Australia, India, Ireland, Peru and the United States.
The metal is up over 30% on a year to date basis and is heading for the biggest annual gain since 2009 following the closure of two of the world’s largest mines, MMG Ltd.’s Century and Vedanta Resources Plc’s Lisheen.
While most major commodities are experiencing a supply glut, Core Consultants notes the significant drawdowns in zinc inventories, coupled with the fact that no major forthcoming supply is expected in the immediate term, could result in a supply deficit of around 10,000-15,000 tonnes over the coming months.
One of the main applications of zinc is in the use of galvanized steel for cars and buildings. It is questionable though in an environment of very weak growth, whether demand for automobiles and increased infrastructure is likely to pick up meaningfully in the coming months and years, especially considering the moderation in Chinese growth.
However, over the last six months, Chinese economic data has been stronger than anticipated, adding a bid on the metal. In particular the China Association of Automobile Manufacturers (CAAM), indicated that production volumes increased by 5.8% y.o.y in the first five months of the year, while fixed asset investment increased by 10.7% in the first quarter. China is the most significant zinc consumer, accounting for around 47% of overall demand, 60% of which is skewed towards construction and the remainder towards transport and the white goods sector.
Get our daily investorintel update
It is interesting to note that in this regard, Vedanta Resources has dedicated half of its reported $1bn capex budget to zinc. This figure is up from the 20% in previous years and given that zinc has provided an alleged 30-50% of Vedanta’s pre-tax earnings in recent years, it is perhaps not hard to see why the company would look to the base metal as a major future money spinner.
Vedanta had also originally planned to invest $630m into one of the world’s largest zinc deposits at Gamsberg in South Africa but this was later cut to $400m. In the interim, the company has only spent around $20m on the project but last week reiterated its commitment and indicated plans to spend $200m this year.
The major question though is whether the Zinc market will continue to remain in deficit in the coming months given that prices have risen so sharply recently, which may incentivise more producers to come online.
Glencore opted to close some of its profitable zinc mines, cutting global output by 4%. This may have been a ploy to prop up prices, but more likely was probably a result of Glencore’s debt issues that required that the company reduce expenditure.
With this in mind, whether the zinc deficit is set to remain in place in coming months is perhaps doubtful and in this sense Vedanta could be taking a bit of a gamble.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.