September 3, 2008

Slide in Zinc Prices Battering Producers INVESTING

By Julie Crust

Sliding zinc prices are taking their toll on mining companies, but the market will not turn around anytime soon, industry analysts say.

Mine closings and production cuts have occurred as energy, labor and equipment costs rise while zinc prices drop.

And the pain will continue. The question is whether weak demand and global oversupply will keep prices falling into 2010, or whether the market will turn around next year.

"We would need very, very, very significant production losses to bring the market back to balance" in 2009, said Giles Lloyd of CRU Group, an industry consulting firm. "Some producers are now realizing that they were being a bit hopeful thinking that the market could turn in 2010."

Zinc, mainly used to galvanize steel, is one of the worst performers in the metals field this year. In August it dropped to its lowest level since November 2005; it now trades at around $1,745 a metric ton, down almost 25 percent so far this year.

It is no wonder that prices have dropped.

Zinc stockpiles at the London Metal Exchange have jumped 80 percent this year to 160,000 tons, and a Reuters survey of analysts showed an expected surplus of about 281,250 tons this year, growing to 328,758 tons in 2009.

However, some market watchers still expect a shift to a deficit in 2010 as producers cut spending and smaller companies, which typically operate zinc-lead mines, struggle to find financing for new projects and to gain environmental approvals.

"The market will turn around quite considerably in 2010," said Gayle Berry, an analyst at Barclays Capital. "The concentrate market is going to move into deficit due to closure of mines." She added that some smaller mines would reach poorer grades of ore.

Berry expects prices to average $2,073 a ton this year, $1,900 in 2009 and to jump to $3,100 in 2010.

A Reuters poll in July found that zinc prices in the spot market were forecast to average $2,133 a metric ton in 2008 and fall to $2,000 in 2009. On Tuesday, cash zinc was trading at $1,762 a ton, and it has averaged $2,155 so far this year.

Weaker demand will also slow the recovery of zinc prices.

Lloyd, of CRU, said there were indications that demand in China, the world's biggest consumer of the metal, was beginning to slow markedly, and that the debate centered on whether internal demand would slow as export markets for China also weakened.

Consumption is also falling in Europe, the next-biggest consuming region, as economies there slow down.

European refined zinc demand fell 7.8 percent in the first half of 2008 from a year earlier, according to the International Lead and Zinc Study Group. Demand in Japan and the United States was little changed.

Still, Michael Jansen, an analyst at JPMorgan Chase, said: "The only way you are going to end up with a surplus post-2010 is if you assume a lot of mines are going to open and demand is going to fall through the floor."

A number of mining companies have already closed operations or reduced output, and CRU estimates that the cuts and closings announced so far will result in the loss of about 275,000 tons of zinc next year.

Teck Cominco and Xstrata will close the Lennard Shelf lead-zinc mine in Australia about three years earlier than planned. HudBay Minerals, Western Mining and Perilya are some of the other mining companies to be hit by lower prices.

"There will be more pain for zinc miners," said Leon Westgate, an analyst at Standard Bank.

Jansen, of JPMorgan, said: "Unless we get a really significant move in the dollar and oil prices that pull the cost of production right down, then over the next 12 to 18 months we will see more damage in the sector and things will look quite tight again in 2010."

In early 2000, the costs of production were $1,100 to $1,300 a ton, but this band has now shifted up toward $1,500 to $1,800, said Mike Baker, an account manager at Ambrian Commodities.

Projects, including a plan to dig a zinc mine in Burkina Faso that was called off in July, have also been abandoned due to financing problems.

"I think there is going to be a real struggle to bring on new zinc-lead projects in the mid- to short-term," Jansen said. "There is no other commodity that has such a poor pipeline."

Originally published by Reuters.

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