How Did Investors Miss This Boom?
We warned (here and here) in the first half of the year that substantially higher zinc prices were coming… even as far back as Q4 2012 we published a lengthy piece documenting our thesis behind higher future zinc prices. It’s a metal that, when examining the global production landscape five years ago, we knew would boom out of its hibernation…
In October of 2012, when zinc traded for approximately $0.84 per pound, we stated,
“The reality that zinc is heading into a supply deficit within 12-18 months is the reason we are writing you this week. We are not going to miss out on this opportunity. Once these zinc mines across the world, which are scheduled for shut-down, close their doors forever it will be too late to begin the search for viable zinc assets of the next generation. The big players move ahead of trends. They don’t join them. The preparation for a shortfall won’t begin in 2014, when the supply deficit is expected to hit, but long before that. In fact, it is happening right now.”
Today, zinc’s price is exploding, with upward momentum appearing nowhere close to completion.
Much has been driving the frenzied buying activity for zinc – from mine closures to rising demand and falling supply in China. Relevant of late are signs the global economy is surging. Led by business optimism rising the most in 37 years in the United States, countries are reporting relatively strong growth the world over. Zinc, as detailed in our writings, is directly tied to economic output.
Global Economic Growth on the Uptrend
- U.S. Q2 GDP came in at 2.6%
- Canada’s Q1 GDP came in at 3.7%
- Japan Q2 GDP, 4%
- China beat estimates reporting 6.9% Q2 GDP growth
Even the anemic and often forgotten E.U. put up GDP of 2.2% in Q2, compared with the same quarter of last year.
Naturally, this widespread economic growth is bullish for base metals and is resulting in multi-year highs for many.
On May 28th, we published a zinc-themed Weekly Volume – This Metal Could Crush Fossil Fuels. The article highlights the ongoing commercialization and future potential of rechargeable zinc batteries. While steel production is still the driving force for zinc, new sources of demand can drive investor sentiment. Zinc, copper and other traditional base metals, such as nickel, are surging to the fore of the sexy clean energy market.
A few weeks later, on June 19th, as the price of zinc hit a multi-month low, we urged our subscribers to look closely at the base metal’s fundamentals. In Investors Miss Out While Majors Acquire, we wrote that,
“Zinc, the fourth most mined metal in the world, has seen its demand steadily increase for decades. The metal is primarily used to galvanize steel, but its use in agriculture as a fertilizer to increase the productivity of soil has increased markedly in recent years. New potential applications in renewable clean energy batteries add a blue sky component to the demand side as well…”
“As more people consume greater quantities of resources every year, the search for profitable zinc mines will intensify.”
Future Zinc Mines to Settle Zinc Prices
Our article broke down the world’s top 4 zinc mines to come online and highlighted that they are all located outside North America.
To learn about the four mines being upgraded and brought online, as well as the supply and demand fundamentals surrounding the zinc market, click here.
N.B. One caveat to rising zinc prices is Glencore. The Swiss commodity behemoth is a producer and trader of the metal. The company announced significant zinc production cuts in 2015. If Glencore reactivates even some of its offline capacity, it could send a temporary shockwave to the market.
China | Still Driving Force for Zinc
For many industrial metals, the developing world, specifically China, accounts for the bulk of demand. CNBC reported on May 19th that,
“China’s refined zinc output marked its lowest in more than two years in April as the impact from the closure of major mines in places such as Australia and Ireland stifled the concentrate supplies China relies on to churn out finished metal.
The nation’s ‘war on pollution’ has also curbed output as Beijing clamps down on mining and heavy industry in a drive to clear its skies.”
Our mid-June report was a prescient warning given this week’s major headline about zinc.
Steel Production Cuts to Bolster Zinc Prices
A UBS analyst out of Melbourne confirmed in an August 21st Reuters article that,
“Closing old and inefficient steel capacity in the 26 + 2 cities is set to cut production by 50 percent and aluminum by 30 percent, before mills and smelters elsewhere in China lift output to compensate.”
“(This)… is driving positive sentiment right now.”
Back in May, we wrote that “…supply tightened after China reportedly shut down power to 26 zinc and lead mines in the Hunan Province amid safety and environmental concerns last year.”
The Chinese government fears nothing more than an uprising by its people. As a result, it is acutely focused on economic growth and the living standards within its borders. A downturn in either and there are tens of millions, if not hundreds of millions, who could turn on them.
Today’s concern for the Chinese people is air pollution; and the government is working overtime to improve it as poor air quality has resulted in thousands of lives lost in China every month. The Guardian reported, “Physicists at the University of California have found 1.6 million people in China die each year from heart, lung and stroke problems because of polluted air.”
China’s Tangshan Leads Cuts in Steel Production
In a June article, titled China’s Tangshan starts new campaign to implement steel cuts, Reuters reported,
“The major Chinese steel city of Tangshan has launched a fresh crackdown on mills that illegally restart production or violate industry overcapacity rules, according to a notice published by the China Iron and Steel Association…”
The article went on to confirm that, in Tangshan alone, the government “aims to close around 8.6 million tonnes of annual production capacity this year.”
“Hebei aims to cut major emissions by more than 15 percent by 2020 and will step up efforts to force local industries to meet their pollution targets for 2017, the official Xinhua news agency reported, citing a local government plan…”
China is curbing steel production at a time when demand is surging. According to a news.com.au article from August 7th, “Chinese rebar steel futures jumped 4 per cent to their highest in four years…”
These factors are specifically pushing zinc and nickel prices higher. Nickel traded at a multi-month high this past week.
Copper Signals Global Economy Set for Growth
Unsurprisingly, copper, also known as Dr. Copper for its price reflecting the state of the global economy, is performing exceptionally well amidst the current surge in global growth. Hence this past week, futures for September delivery climbed above $3 per pound – the highest since November of 2014.
“Copper’s 2017 year to date gains in percentage terms now top 19% and the red metal has recovered 55% in value after falling to six-year lows below $2.00 a pound in January last year.”
Positive sentiment from the U.S. economy to Japan and even the E.U. are spurring demand.
Copper mines, plagued with strikes and bad weather, have lost nearly 10% of production in the first quarter of 2017. A major contributor was Escondida, the world’s largest copper mine, which endured a 43-day strike earlier this year. Freeport McMorRan’s Grasberg copper mine, the world’s second largest, is currently enthralled by a worker’s revolt. Reports are sketchy, but disgruntled workers have clashed with security forces. In Copper price rallies after Grasberg violence,
“Reuters reports at least seven people were injured and dozens of vehicles and buildings torched.”
Copper Prices Remain in Uptrend
All of these metals, in addition to gold which hit $1,300 last week, are benefiting from a weak U.S. dollar. With Trump keeping the greenback in check, and the global economy rebounding, raw materials and commodities are the assets to own at the moment. As a result, zinc majors begin to report huge profit margins amidst the highest prices in over a decade, expect interest in the sector from generalist investors to pick up. Consequently, that’s when you look to take some off the table.
All the best with your investments,
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