Zinc prices gapped up last week and are grinding higher towards a 3-month high. Zinc spot was trading at US$1.24 per pound Wednesday. While, the base metal fell in April and May, collapsing inventories have made June a great month for zinc.
Zinc Prices Rise on Falling Inventories
Zinc’s uses are expanding into agriculture and renewable batteries; yet, the majority of demand comes from zinc being a critical component in steel-making due to its anti-corrosive qualities. The base metal traded to a near 3-month high as the U.S. dollar index sunk 0.5%; the U.S. dollar has been under pressure, momentarily falling below the 96 handle Wednesday.
Zinc Inventories Fall and China Pays Premium
Zinc stock inventories are dangerously low with less than 15 days of world consumption. The most obvious indicator that inventories are low can be seen through data out of China. Official LME data is also helpful.
According to Reuters article from this morning,
“CHINA ZINC: Premiums for zinc held in China’s bonded zones are near their highest levels this year at $US195-$US200 from about $US130 earlier this year.”
Hence, China is a net importer of zinc, despite being the world’s largest producer. China and the developing world are gobbling up zinc as they execute on multi-staged infrastructure projects that require many tons of galvanized steel.
Also,
“ZINC SPREAD: The discount for cash over the three-month contract has narrowed to near zero from around $US20 a tonne on June 12, another sign of a tighter LME market.”
Both of these metrics point to a tighter supply of zinc moving forward. As long as GDP stays elevated, at or above 5%, in the developing world, zinc will stay in supply deficit.
In a late-2016 article from The Motley Fool, with the subtitle Zinc is red hot right now, which is a boon for zinc companies. Here’s how to play the rebound in this important base metal; a common challenge to zinc investing explained:
“The zinc sector is a tough one for investors because there are no primary zinc producers that trade on major exchanges. That said, there’s still profit potential buried within the sector, which provides investors who know where to look with some hidden upside should zinc continue rising.”
Zinc Investors Review Major Producers and Top Assets
According to Motley Fool, Teck was the world’s third largest zinc producer of zinc in 2015; and, the metal supplied 31% of its gross profit. This stat is very telling with respect to the profitability of zinc and base metals in general. Investors continue to seek out undervalued zinc stocks with production-ready assets. Exploration upside is not rewarded the same way with base metals as precious metals, but this could change. As mines see their resources decline, major zinc producers including Teck and Hecla may start looking for acquisition targets. While, majors swim in profits, it is logical to assume they may be more inclined to snap up more advanced project. Small-cap investors are searching out undervalued juniors that have already secured high-grade zinc assets. In conclusion, as zinc prices move higher and the supply deficit intensifies, I expect M&A activity to increase in the zinc market.
