LONDON, June 17 -- India-focused mining group Vedanta Resources'(VED.L) recent buy of Anglo American's(AAL.L) zinc assets shows its faith in high prices for the metal in the long term.
Others agree, basing their view on an expected acute shortage of mine supply in three to four years as a few big mines run dry. Some zinc smelters, most notably in China, would have to scramble for material to satisfy hungry consumers.
Companies like Vedanta, with enough mines to feed their smelters, would be well placed to benefit from any price surge.
But even if mine output is constrained, the build-up in zinc metal stocks in the interim may suffice to meet demand and carry the market through the critical period relatively unscathed.
London Metal Exchange (LME) stocks of zinc -- used as an anti-corrosive in autos and construction -- reached 620,475 tonnes in May, their highest in almost five years. The worry is they will continue to swell as refined production rises sharply.
"If you look out three to four years mine production is less than metal demand, but we are wary that enormous stocks of the metal are being built up," said Graham Deller of industry consultants CRU Group.
"There could be so much stock that it gives an extra two to three years to develop mines so the mine crunch doesn't come. There's enough lead time for a few more mines," he added.
A number of analysts predict the global zinc market will be in a surplus of around one million tonnes this year, with another year of big stock rises next year.
But there are still concerns a mine supply shortage could restrain metal output further ahead.
Some large mines are becoming depleted and the global economic recession has led to project delays and cancellations and curbed exploration.
Vedanta will be one of those able to satisfy its own smelter expansion plans in India. Its purchase for $1.34 billion last month of Anglo's zinc assets, including mines in Ireland and South Africa, make it more than self-sufficient in raw materials.
Refined zinc major Nyrstar has also been on the mine acquisition trail for some time. Earlier this month, the company said it was confident of announcing another mining purchase at the end of July.
But some companies could struggle.
CHINA STILL SEARCHING
If mine shortages occur, raw material hungry firms such as the Chinese bidder believed to have lost out to Vedanta over Anglo, likely will be scratching around for other mine assets.
In 2000, China had excess zinc smelting capacity of 8 percent. By 2009 that had grown to 36 percent, according to estimates by Stockholm-based consultants Raw Materials Group (RMG).
"We expect there'll be a much stronger tendency for China to buy assets overseas to feed their huge surplus of zinc smelter-refinery capacity," Martin Jansson, a mineral economist at RMG, said.
On Wednesday, China's Minmetals said it is working with its Australian arm, MMG, to identify merger and acquisition targets this year.
Jansson expected Chinese firms to look mainly at mines or miners in Latin America and Central America.
"Peru is a strong zinc producing nation and it's a good transport route into China. It's easier to get a stake in companies in these countries than in say Canada or Australia," he said, speculating that Volcan and Milpo -- controlled by Brazil's Votorantim -- could be among those Chinese companies had in their sights.
Vedanta's motive for increasing its zinc exposure is at least in part down to the strong demand growth the company has witnessed in India.
Last year, India became the world's third-biggest consumer of zinc, with offtake there bucking the trend in most other countries, rising by more than 6.0 percent to 515,000 tonnes, latest International Lead and Zinc Study Group estimates show.
Even if it is sated in zinc for now, other metal assets will be on Vedanta's radar. Some believe it could become one of the world's top five mining firms.
"In every business they are in, including power, they have plans to expand. I believe it is possible because their track record is good and they deliver on what they say," said Pawan Burde, vice president - research, PINC Research in Mumbai.
But breaking into the top five may be a step too far.
"It would take a lot of years at least, even with aggressive acquisitions it would still need to do some organic growth," RMG's Jansson said.