The Hindu Business Line : Zinc may rebound on low inventories

A balanced market in 2007 may be followed by a surplus in 2008 and 2009 as a wave of mine production increases arrives in the market; but a serious tightening of zinc around the end of the decade seems to be a distinct possibility as existing mines are depleted.

Inventories

In the near-term, there is scope for a bounce-back in prices as inventories start to decline again and supplies could tighten; but a roller-coaster ride over the next few years may be in store, according to Macquarie Research Commodities.

The signs of a recovery are already visible.

After being the funds' favourite in the fourth quarter, zinc suffered a dramatic sell-off through January as speculative longs liquidated their positions following a temporary rebalancing of the market in view of Chinese exports at the end of the year.

New positions

In February, while prices have been rising, the fall in LME open interest through January was reversed, suggests the building of new longs again.

There is likelihood that the surge in Chinese exports has come to an end, Macquarie argued, adding that the ($600 a tonne late last year) differential between export prices and Chinese domestic prices has narrowed, reducing the incentive to export.

In addition, there has been re-emergence of buying. North America is believed to be in the market after a gap of three months, given the attractive prices.

This can tighten the market in the short-term.

Tipping to deficit

So, lower stocks and lower Chinese exports together with marginal pick up in demand will be enough to tip the zinc market into deficit, according to Macquarie.

Once strong mine production in 2007 and 2008 begins to feed through into refined metals output, the outlook for the next two years would begin to become a matter of concern as stocks are set to expand.