SCOTTSDALE, Mar. 4 -- China's emergence as one of the world's leading economic powerhouses and premiere driver of global zinc demand will set the industry standard for years to come and dictate where future market balances will lie.
"Like it or not, China has truly become the most major force in the world of zinc," said Christopher Parker of Brook Hunt, a research and consulting firm for the mining and metals industry, during a panel discussion on China at the 2010 International Zinc Conference.
"Economic liberalization in China has now been under way for about three decades. China today has the outward appearance of a capitalist system, but it is not. It is a market economy within a Communist political system," he said.
China has been the main driver of the world's zinc consumption for the last two decades, securing a compound annual growth rate of 12 percent per year.
In 2009, imports of the metal, used primarily as a galvanizing agent to protect steel against corrosion, jumped a staggering 265 percent from 2008 levels.
Government spending from China's $585 billion stimulus package played an important role in 2009's import demand boom, Parker said.
Infrastructure investment grew 44 percent above 2008 levels, with railway investment up 67 percent, road investment up 40 percent and a 60 percent jump in public urban transport systems.
Parker said the development of China and its zinc demand was characterized by exceedingly high levels of fixed asset investment, fueling the rapid expansion of manufacturing capacity to supply the country's export market.
According to the International Monetary Fund (IMF), China's focus on exports and the development of capacity and infrastructure associated with those exports has resulted in a sector accounting for 60 percent of the country's GDP growth over a period from 2001 to 2008.
But that reliance on exports opened China up to the impact of 2009's financial crisis and recession in the United States.
"While the recovery outside of China now is still fragile and liable to set-backs, we forecast Chinese zinc demand growth this year and next year will be relatively modest at 9 to 10 pct per annum," Parker said.
"Near term, Chinese authorities will continue to look to the export markets as the major driver of economic growth, which of course will have an impact on zinc consumption."
Following a year in which the price of zinc CMZN3 rallied over 140 percent, Chinese mine production grew by only 7.6 percent in 2007, substantially lower than the 12 percent annual average of the previous four years.
"Finally, we have some proof, some firm evidence that China is not a bottomless pit of ever-expanding mine production, and there is now less ore available to be accessed by the swing capacity of the small mine sector," Parker said.
"The next period of super-growth is probably dependent and must await the identification of new ore deposits and the development of new mines."
The rapid recovery in LME zinc prices in 2009 has caused a massive disconnect with underlying fundamentals, allowing Chinese producers to increase output without any improvement in demand.
Year-over-year output of refined zinc in China surged 11.6 percent to 4,416,100 in 2009 as the country ramped up a substantial amount of idled capacity.
That lack of producer restraint caused a significant market imbalance which is still in effect today. Zinc stocks at LME warehouses have jumped 50 percent in the past 12 months, to about 542,000 tonnes versus some 352,000 tonnes last February.
The International Lead and Zinc Study Group (ILZSG) said the world zinc market was in a surplus of 445,000 tonnes last year, its largest since 1993.
"A lack of discipline by mines and smelters this year could produce another surplus approaching 1 million tonnes," Parker said, setting the scene for four or five years of unattractively low zinc prices.
"Conversely, producer discipline this year, and we must look to China as being (a) major agent in this, would set the scene for tight market conditions to develop, with very good zinc prices to emerge around 2013-2014."