London, 8 June 2010

Swollen stocks, creeping doubts over demand and a growing supply surplus mean zinc prices will remain under pressure overall this year even if they are due a bounce before the year end.

Zinc has fallen about 38% in the year to date, making it one of the worst performers on the London Metal Exchange. It traded at around $1,600 a tonne on Monday morning, having hit a near 11-month low of $1,577 earlier.

Prices of the metal used as an anti-corrosive in cars and construction have been crippled by a growing supply overhang. LME stocks are at their highest since mid-2005, Shanghai stocks are at record highs and talk swirls of up to 1 million tonnes of unreported stocks in China.

Meanwhile, the global zinc market is headed for a 418,000 tonne surplus this year, the International Lead and Zinc Study Group (ILZSG) said recently, citing production restarts and expansions in China and India.

Some analysts put the surplus higher. But the downside is also limited as prices fall towards production costs and players come to reassess panic over Europe's debt crisis.

"There's too much zinc around, it's as simple as that (but) zinc doesn't have that much more down to go before you hit the top end of the cost of production," said JP Morgan analyst Michael Jansen.

Higher cost producers may curb output if they start to lose money. "This year it does seem the trend is up to down, but there's bit of value in prices right now. If (sovereign risk) deteriorates, you'll see zinc at $1,300 but I just don't think it's going to happen."

Zinc, along with other metals, has been knocked by fears that the debt crisis in Greece will engulf other European economies and may even result in a double dip global recession.

Added to this are recent concerns that zinc demand growth might be slowing in top consumer China. But these worries may yet look overdone given China growth is still robust overall.

Demand Wavers

On the other hand there are worries over demand that could stick. Off-take from the galvanised steel sector - which accounts for more than half of global zinc usage - has wavered this year and could take a further hit as a seasonal summer slowdown sets in.

"We expect a rebound in (zinc) demand this year but that rebound is slow to emerge. We've not seen the same increase in galvanised steel as in crude steel," said GFMS Managing Director Neil Buxton, who sees demand rising 6%t this year versus a 5.2% drop last year.

According to the ILZSG, global zinc demand rose 24% in the first quarter, but the growth looks strong largely because demand was so poor a year earlier. Growth for the year as a whole will be far less impressive at 11.3%, and more than offsetting that is rising supply.

"Producers are prematurely boosting production," Buxton said. "At the moment most pointers are negative (but) we're close to the bottom on zinc, if prices fall further we'll start to see production cuts." Production cuts, however, can take time to emerge and are not in sight at present.

Glencore has resumed operations shut for more than a year at its largest lead and zinc mine in Peru, while Teck Resources is proceeding with the planned expansion at Red Dog in Alaska, the world's biggest zinc mine. Meanwhile, the world's top zinc smelter, Nyrstar , is maintaining restarts for now, having reported a 16% quarterly rise in Q1 output.

Cedric Chehab, head of commodities research and strategy at Business Monitor International, voiced concerns about the reluctance of miners and smelters to shut down in the near-term.

"We see an emerging downtrend, a weakening macro picture in the second half combined with an increase in the surplus and rising inventories," he said, referring to his worries about supply and China's property bubble.

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