ANALYSIS-Zinc prices to slide further on oversupply

Tag : zinc
Canada - By Julie Crust
LONDON, Sept 2 (Reuters) - With sliding zinc prices taking theirtoll on miners, they can be forgiven for asking when the marketwill turn upwards -- not any time soon, according to marketexperts.
The industry has seen mine closures and output cuts as energy,labour and equipment costs rise while zinc prices drop.
And the pain will continue -- the question is whether weak demandand global oversupply will keep prices falling into 2010, orwhether the market will turn around next year.
"We would need very, very, very significant production losses tobring the market back to balance" in 2009, said Giles Lloyd ofindustry consultants CRU Group.
"Some producers are now realising that they were being a bithopeful thinking that the market could turn in 2010."
The metal, mainly used to galvanize steel, is one of the worstperformers in the metals complex this year. In August it dropped toits lowest level since November 2005 and is now trading around$1,745 a tonne, down almost 25 percent this year.
It's no wonder prices have dropped.
Zinc stocks at the LME have jumped 80 percent this year to 160,000tonnes, and a Reuters survey of analysts showed an expected surplusof about 281,250 tonnes this year, growing to 328,758 tonnes in2009.
However, some market watchers still expect a shift to a deficit in2010 as producers cut spending and smaller companies, whichtypically operate zinc-lead mines, struggle to find financing fornew projects and to gain environmental approvals.
"The market will turn around quite considerably in 2010," saidanalyst Gayle Berry at Barclays (nyse: BCS - news - people ) Capital. "The concentrate market is going to move into deficitdue to closure of mines ... and a number of smaller mines willreach lower ore grades."
Berry expects prices to average $2,073 a tonne this year, $1,900 in2009 and to jump to $3,100 in 2010.
A Reuters poll in July found that cash zinc prices are forecast toaverage $2,133 a tonne in 2008 and fall to $2,000 in 2009. OnTuesday cash zinc was trading at $1,762 a tonne, and has averaged$2,155 so far this year.

CHINESE DEMAND SLOWS
Weaker demand will also slow the recovery of zinc prices.
CRU's Lloyd said the signs are that demand in China, the world'sbiggest consumer of the metal, is beginning to slow strongly, andthat the debate is whether internal demand will slow as exportmarkets for China also weaken.
Consumption is also falling in Europe, the next biggest consumingregion after China, as economies slow down.
European refined zinc demand fell 7.8 percent in the first half of2008 from the year-earlier period, according to the InternationalLead and Zinc Study Group. Demand in Japan and the United Stateswas little changed.
Still, Michael Jansen, analyst at JP Morgan, said: "The only wayyou are going to end up with a surplus post 2010 is if you assume alot of mines are going to open and demand is going to fall throughthe floor."
A number of miners have already closed operations or slashed outputand CRU estimates that the cuts and closures announced so far willresult in the loss of around 275,000 tonnes of zinc next year.
Teck Cominco Ltd (nyse: TCK - news - people ) and Xstrata (other-otc: XSRAF.PK - news - people ) Plc will close the Lennard Shelf lead-zinc mine in Australiaabout three years earlier than planned. HudBay Minerals Inc.,Western Mining and Perilya Ltd are just some of the other miners tobe hit by lower prices.
"There will be more pain for zinc miners," said analyst LeonWestgate at Standard Bank.
For a factbox on major zinc mine cutbacks and closures see
In early 2000, the costs of production for the economic and leasteconomic producer were around $1,100-1,300 a tonne, but this bandhas now shifted up towards $1,500-1,800, said Mike Baker, accountmanager at Ambrian Commodities.
"Unless we get a really significant move in the dollar and oilprices that pull the cost of production right down then over thenext 12-18 months we will see more damage in the sector and thingswill look quite tight again in 2010," said Jansen.
Future projects have also been abandoned due to funding problems,such as plan to dig a zinc mine in Burkina Faso that was called offin July.
"I think there is going to be a real struggle to bring on newzinc-lead projects in the mid- to short-term," said Jansen. "Thereis no other commodity that has such a poor (project) pipeline."(Editing by Michael Urquhart) Copyright 2008 Reuters, Click for Restriction