ZINC-Major Market Developments in July

LONDON, Aug. 13 -- The global zinc market is on course to record a massive supply surplus this year, unless miners cut production, but the recent rebound in prices is acting as a deterrent, analysts say.

"We think the price will fall, but if it stays where it is then we're looking at a 1.5 million tonne surplus in zinc this year," said Graham Deller of industry consultants CRU Group.

"Even if it falls in the second half we'll be lucky to squeeze that surplus down to anything more than 1.2 million tonnes," he added.

The bulk of mine cuts would have to come from high cost mines in China. But the recent run-up in prices has eased pressure on them.

Deller said he expected price moves to be volatile in coming months, but he said the overall trend would be lower, with $1,500 a tonne a likely target by the end of the year.

The London Metal Exchange (LME) three-months zinc price CMZN3 was last indicated at $2,043 a tonne.

Will Adams of BaseMetals.com said prices had run ahead of the market's fundamentals and was worried about possible slowing demand.

Citi analyst David Thurtell also spoke of zinc demand's vulnerability.

"The market's still in over-supply. I don't see prices doing much on the upside compared with other metals," he added.

Below are some of the more significant recent developments in production, stocks and prices that may continue to influence the direction of the market in 2010.

PRODUCTION:

July 28 - Peruvian President Alan Garcia accused Doe Run Peru of "playing games" and said its licence to operate the sprawling La Oroya smelter would be cancelled after a drawn out financial crisis.

July 27 - Peru moved to permanently shut Doe Run's La Oroya smelter as the firm failed to raise cash to reopen its sprawling plant, but the government still left the door open for another firm to buy the troubled plant. Doe Run Peru, a unit of privately held U.S.-based Renco Group, owns the La Oroya smelter, which was idled a year ago after the unit fell into financial trouble when metals prices plunged during the global crisis.

July 23 - An explosion at a zinc refining facility in western Pennsylvania killed two employees and halted operations at the plant, Horsehead Holding Corp (ZINC.O: Quote) said. [ID:nN23122223] On July 28, the company gave an update on the plant and said the refinery remained on temporary shutdown, while the smelting facility was operating five of its six furnaces. [ID:nASA00KIP] On Aug. 3, the company said a declaration of force majeure on some zinc oxide and special high-grade zinc contracts may last for several months. 

July 15 - China produced 2,477,000 tonnes of refined zinc in the first half of the year, up 30.4 percent from the same period last year, according to the National Bureau of Statistics. Output of mined zinc rose by 40.7 percent over the same period to 1,795,000 tonnes.

July 9 - OTZK OTZK.BB, Bulgaria's second-largest zinc and lead smelter, will have lower production initially planned this year due to maintenance halts, the chairman of its supervisory board said. The repair works that took place in the spring will cut both zinc and lead production by 3,000 tonnes to 18,500 tonnes of zinc and 18,000 tonnes of lead in 2010, he said.

PRICES

Taking their lead from a more buoyant copper market, three-months zinc prices made substantial headway in the latter part of July.

In the early part of the month they were pressured by double dip worries, but as investors grew more optimistic about the economic outlook so prices firmed.

Despite having what are widely considered to be the worst fundamentals of all the major LME-traded metals, zinc prices ended July the month's high of $2,025 a tonne, up 13 percent from $1,792.50 at the end of the previous month.

That strength continued into early August and on Monday they reached $2,179, their highest since around mid-May. Growth worries have since pared those gains.

In July, the twice-yearly Reuters base metals price poll [MET/POLL] put the median average for the LME cash zinc price MZN0 at $2,050 a tonne, down from the January forecast of $2,293.

STOCKS

LME zinc stocks appear to have levelled off for now, albeit at high levels. They ended July at 619,800 tonnes from 616,900 tonnes the previous month.

On July 21, they stood at 620,825 tonnes, their highest in just over five years, but daily movements have tended to be small.

But the sharp rise in cancelled LME warrants at New Orleans warehouses signal a period of sustained drawdowns at that location and could point to a period of falling inventories.

Stocks of zinc held in Shanghai warehouses fell to 242,832 tonnes at the end of July from 255,265 tonnes a month earlier.

Western world commercial stocks totalled 1,048,700 tonnes or 7.7 weeks of demand at the end of May, compared with 983,800 tonnes or 7.7 weeks the previous month and 923,000 tonnes or 8 weeks at the end of 2009.