The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Shrinking supplies seems to overcome gravity of slowing base metals demand
Caught between an updraft caused by dwindling supply and the gravity of slowing growth in global demand, zinc prices seem to have reached a cruising altitude above US$1 per pound.
Recent closures of two large zinc mines - Century in Australia and Lisheen in Ireland - wiped out more than 600,000 metric tons of the world's annual supply of the galvanizing metal.
Analysts expected these looming supply deficits to send zinc prices soaring well above US$1/lb. in 2015. While the metal did climb to US$1.10/lb. in May, lackluster global economic growth muting the demand for commodities in general instead dragged the price to seven-year lows.
With zinc prices falling below US70 cents/lb. late in 2015, Glencore PLC slowed its output, removing another 500,000 metric tons from the global supply.
"The main reason for the reduction is to preserve the value of Glencore's reserves in the ground at a time of low zinc and lead prices, which do not correctly value the scarce nature of our resources," the Switzerland-based company explained.
In the July 26 edition of its commodity prices index, Scotiabank said the 8 percent drop in zinc supply resulting from the two large mine closures and Glencore's curtailment sets zinc apart from its contemporaries.
"The base metals narrative remains split between demand-driven stories surrounding beleaguered contenders like copper and the supply-centric focus in outperforming metals like zinc and, more recently, nickel," the Canadian bank penned in the report.
Adding, "Zinc remains the bullish story within the base metals group."
This tale of zinc prices rising 41 percent since the beginning of the year is a good read for Teck Resources Ltd., operator of the Red Dog zinc mine in Northwest Alaska, and Hecla Mining Company, which enjoys considerable by-product credits from zinc recovered at its Greens Creek silver mine on the state's Southeast Panhandle.
Starving market
CRU, a global analyst and consultant focused on mining, metals, fertilizers, believes the supply-side shortage will continue to push zinc prices higher.
In a report published at the end of July, CRU Head of Zinc Research Graham Deller wrote, "With concentrate stocks now almost exhausted, metal inventories will fall sharply soon, and further significant price increases look likely through the course of next year."
The world's best-known stockpile of zinc is already being eroded. Inventories in the London Metal Exchange warehouse have dropped from about 480,000 metric tons in January to below 440,000 metric tons, or about 12 days of global demand.
Most analysts are predicting that more clandestine zinc inventories will find their way to market as prices rise.
"While it is possible that further inventories are delivered to the major exchanges from hitherto less visible locations, it is inevitable that we eventually see an impact on refined (zinc) supplies and the current rally is likely the market preemptively getting ahead of this tightness," Scotiabank penned in its July commodities index.
Scotiabank and CRU see the current market imbalance eroding both the known and less visible stockpiles of zinc.
Deller said, "The key question in the zinc market is no longer whether, but is now when will the market run out of metal?"
Scotiabank sees this depletion of stocks happening sooner rather than later.
In its annual Global Outlook report published in early July, the bank forecast zinc prices to average US$1.25/lb. in 2017.
"Prices are expected to rise over the coming years until sufficient supply can be incentivized back onto a starved market," the bank penned in the comprehensive economic report.
Welcome news
Rising zinc prices is welcome news to Teck Resources and NANA Regional Corp., owners of the Red Dog Mine in Northwest Alaska.
Red Dog is on track to produce about 570,000 metric tons (1.26 billion lbs.) of zinc in 2016. Accounting for roughly 5 percent of the world's supply, this arctic operation supplies nearly as much zinc to global markets as did the recently closed Century and Lisheen mines combined.
Teck is the operator at Red Dog and NANA, the Alaska Native regional corporation that owns the land where the zinc-rich mine is located, is 30 percent owner of the operation. NANA's ownership increases by 5 percent every five years and is set to climb again in 2017.
In its second-quarter 2016 report, Teck noted that on top of the deficit brought on by the closure and suspension of several large mines, demand for zinc is expected to grow at about three percent per annum during the next two years.
"While the commodity cycle continues to be challenging, we are starting to see some positive changes in the direction of zinc and steelmaking coal prices," said Teck President and CEO Don Lindsay.
While zinc is the primary metal produced at Red Dog, it also is an important tertiary metal at Hecla's Greens Creek Mine near Juneau.
Thanks to zinc, along with lead and gold, the cost to produce an ounce of silver at this Southeast Alaska operation totaled just US$4.61 through the first half of 2016. The ongoing upward trend in gold prices and zinc sitting above US$1/lb. should help drive the already low production costs at Greens Creek even lower.
*This article was updated on Sept. 27 to correct the estimated 2016 zinc output at Red Dog to 1.26 billion pounds. The estimated zinc production in terms of metric tons was unchanged.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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