Zinc – The Soufflé Always Rises Twice
Readers must, hopefully, pardon my reference to film noir in the title for this article. Of course it is well known that a soufflé never rises twice. However now we have a situation where the Zinc price is ringing on the doorbell for the second time in the last six months as it flirts with the key $1 per lb barrier, below which it ignominiously plunged when the oil price slump was erroneously misread as the end of life as we know it in global metals markets. Everyone now knows that was bogus thinking.
In the space of a few months in mid-2014 the metal that suffered from chronic narcolepsy awoke from its slumbers and rose from the low 90cts range to nearly $1.10 per lb before falling back into a swoon. At the time I pronounced my view that when zinc moves, it will move fast. Now that it has shucked off the fallacious story of oil as some sort of economic canary in a coalmine, it has shot from the low 90 cts area again to the crucial $1 barrier in just a few days. I would reiterate that I would not be surprised to see it top $1.30 in 2015.
This is heady stuff indeed.. The interesting thing is that while many may have regarded our enthusiasm as misdirected in the dark times, zinc is a metal that now has few naysayers. There is nobody out there (that I have encountered, or heard of) who would claim that there is a tsunami of zinc production or vast hidden stocks that will appear out of nowhere to mug us. Everyone is in accord that the dark tunnel we have been through has denuded the production timetable of projects scheduled for production. This means (to mix a Biblical metaphor) that we have spent a long time in the wilderness and (hopefully) the Promised Land is in sight.
Getting to a “Good Place”
Frankly there is no capacity to be revived in Zinc below the $1.50 mark. The recent dive and recovery has just reinforced to Zinc heavyweights that one cannot trust market agents to act rationally in the orbit of this metal. Thus miners/smelters are extremely nervous of jumping on any bandwagon that has had its wheels fall off so frequently in the past.
Zinc has long suffered from being in a sweet spot for other metals and a sour spot for itself. If silver had been $7 per ounce and zinc had been 70 cts per lb, there would have been a mass shutdown of the zinc/lead/silver mining complexes around the world. However silver at around $20 per oz, cross-subsidised the base metals production from those mines that were making small losses or merely breaking even on the lead-zinc part of their output. That means that there are not a flock of mothballed mines (as there are in nickel) ready to be pulled back on-line when the zinc prices passes some mythical point at which it all becomes worth it. Mines have been gradually expiring, as the chart below shows:
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Instead what we have is big time gap between financing future projects now and when they might get into production. This, according to the most authoritative source on the industry, the International Lead & Zinc Study Group, predict that there has been a supply deficit since 2013 and into 2014.
While there are a lot of projects on the drawing boards, we should recall that many of these are monster projects. My belief is that these will NOT be dusted off until zinc is a lot higher (north of $1.20) and for a sustained period of time (at least a year). The major players on the production front will thus play a game of chicken with the market that none of them can lose. If they have current zinc production they will make out very well from a tight situation and a spiking price. They will not have to face the uphill struggle of financing but rather just cash checks. It is not a given that every upturn in a commodity’s price must produce a heedless (headless?) rush into building more capacity.
While we would have said last year that all portfolios should contain a zinc junior, we would have been a voice crying in the wilderness. Now the tide has turned and we suspect few would argue that most should have at least some exposure to this resurgent metal.
The ever present danger is that rallies like the current one prove to be illusory (if not downright delusional). The long term and even medium term perspectives are there, our main worry is the short-term idiot factor. If Zinc can scale back above $1.10 (with copper also getting back above $3 per lb) then Zinc might become, for a few good years at least, an undeflatable soufflé.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>