Zinc market price-rise poses more questions than it answers

Did you know that there has been such a spike in zinc prices this year — up 13% — that a US 1 cent coin, which contains 97% of the metal, now costs 1.6 cents to produce? That’s according to the Wall Street Journal.

The reason zinc reached a three-year high is a worldwide shortfall caused by diminishing output, in large part from the world’s two biggest mines, Century in Australia and Lisheen in County Tipperary, Ireland. Both operators, MMG (owned by China Minmetals) and India’s Vedanta Resources, have announced that their mines will close this year.

The global supply-demand gap reached 296,000 tons in 2014, according to the UN’s international commodity group the International Lead and Zinc Study Group.

This supply shortfall, which has been predicted to last until 2017, means that the race is on worldwide to bring onstream new sources of zinc. Several new projects have been announced, like Vedanta’s Gamsberg open pit mine in South Africa – where first ore is tipped for 2017-18 – and Ivanhoe Mines’ Kipushi project in the DRC province of Katanga.

City analysts have pointed out that the buoyant zinc market – which reportedly “peaks once in a decade” – has encouraged commodities trading house Trafigura to build a 15% stake in  Euronext-listed zinc producer Nyrstar.

Some controversy, though

Yet despite all those positive market and price indicators, there are some in the metals industry who question whether the supply deficit is real or perceived and others who think it may be less than forecasts suggest.

This is because zinc demand is historically driven by China, where the overall supply-demand situation is very hard to discover. The country has its own mining and smelting facilities, but its utilisation levels are entirely opaque.

This leaves a large question mark over the potential “flex” that is in the Chinese system to fill in global production gaps – and poses the question is there actually a shortfall at all?

However, when well-connected industry players like Glencore and Nyrstar have been ramping up production, that could be seen as something of a straw in the wind.