Zinc bear market may end on Chinese demand

SINGAPORE: The 28% plunge in zinc that drove the metal into a bear market may be ending as record demand from steelmakers erodes stockpiles and the price slump spurs producers to curb output. About 50% of zinc is used to rust-proof steel and production of the alloy reached an all-time high of 31.7 million tonne in the second quarter, according to Macquarie Group.

Global stockpiles monitored by exchanges in London and Shanghai are the lowest since April. Prices may climb as much as 27% to $2,450 a tonne next year, according to the median in a Bloomberg survey of 10 producers, analysts and traders.

Prices plunged 58% since reaching a record $4,580 in 2006 as increased production created a five-year glut. The surplus is narrowing as consumption expands to a record, and will shrink next year to its smallest since 2007, according to Morgan Stanley. China expanding at more than twice the speed of the global economy and using more steel than ever may mean shortages as early as 2014, the bank estimates.

“I’m bullish with regards to zinc over the next two to three years and even longer,” said Gavin Wendt, the founder and senior resource analyst at Sydneybased Mine Life, who has followed the mining industry for two decades. “Given the level of underlying demand for zinc and at the same time the fact that new reserves are not being added, there is going to be a supply side problem to emerge over the next few years.”

Zinc declined in three of the past four years on the London Metal Exchange, the worst performance of any of the six main industrial metals. Benchmark three-month futures slumped to $1,820 from $2,539.50 since July on speculation that slowing global growth will sap demand. The metal fell 0.5% to $1,936 a tonne at 3:57 pm in Tokyo on Thursday. The Standard & Poor’s GSCI gauge of 24 raw materials entered a bear market last month after retreating more than 20% since April.

More than $10 trillion has been wiped off the value of global equities since May as the MSCI All-Country World Index of equities retreated about 18%, data compiled by Bloomberg show. Treasuries maturing in 10 years or more returned 24% this year, according to data compiled by Bloomberg and the European Federation of Financial Analyst Societies.

This year’s anticipated production surplus of 270,000 tonne will drop to 130,000 in 2012, Morgan Stanley estimates. Demand will advance 2.6% to a record 13.3 million tonne in 2011 as supply increases 1.5% to 13.43 million tonne, the bank forecasts. That supply is valued at about $31 billion, based on this year’s average price.