My goal is to keep readers ahead of the curve in the commodities markets.
Several months ago, I told readers that zinc would be the next base metals superstar. Sure enough, The Wall Street Journal just reported that zinc is trading at a three-year high – nearly $2,400 per metric ton, or $1.10 per pound.
The best part is that all signs are pointing to a continued rise.
Ultimately, zinc is a classic tale of supply and demand, and there are a few companies that appear to be the heroes of this story.
The main reason for zinc’s rise to its current point is the rapidly shrinking supply. In fact, for the first time since 2007, the zinc market will be in a deficit this year.
Supplies are on a downward slope because several large mines are depleted and have either shut down or are about to close. For example, the Brunswick and Perseverance mines in Canada are already closed. The Century zinc mine in Australia – the world’s third-largest zinc mine – is closing in 2015, and the Lisheen mine in Ireland is closing in 2016.
The mines alone account for about 1.5 million metric tons (mmt) out of a 13-mmt market.
In addition, inventories held at the London Metals Exchange (LME) and the Shanghai Futures Exchange are down nearly 21% compared to the end of last year. That’s a three-and-a-half-year low for the LME!
But that’s only half of the story. In addition to supplies dwindling, demand is also rising.
Demand Heats Up
According to the International Lead and Zinc Study Group, demand is up 7.7% through June 2014, to 6.8 mmt.
As with many commodities, much of that demand comes from China. The country currently accounts for 44% of global zinc consumption.
And even though China is also a major producer of zinc (about 36% of annual supply), the government is forcing many of its mines to close due to environmental concerns. Add to that China’s booming vehicle market, and you get increasing Chinese zinc imports.
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In fact, through July 2014, Chinese imports of refined zinc have soared by more than 39%.
According to one of the main producers, Glencore PLC (GLNCY), worldwide demand at its current rate means we’ll need another 1 mmt by 2016. That’s going to be difficult with no new zinc mines opening in the near future.
Of course, all of these changes equal even higher prices. But how big can zinc go?
The Heroes of Our Story
Noted metals analyst, Patricia Mohr, of Canada’s Scotiabank, is forecasting that the price of zinc will climb to $1.25 next year and possibly as high as $1.60 to $1.70 in 2016.
That’s tremendous news for the aforementioned Glencore, the world’s third-largest zinc producer.
It’s also good news for other zinc mining companies, including Canada’s Teck Resources (TCK). TCK owns the Red Dog zinc-lead mine in Alaska, which is one of the world’s largest producers of zinc concentrate, accounting for 5% of the total global output.
Another possible play is the Powershares DB Base Metals Fund (DBB) exchange-traded fund, with one-third exposure to zinc. The remainder is divided evenly between copper and aluminum, which are other base metals with positive fundamentals.
If Ms. Mohr is correct with her price forecast, these investments are sure to be winners.
And “the chase” continues,