Zinc premiums are expected to stay strong until the end of 2007 as demand for zinc-coated steel for construction and the auto sector outstrips supply of the anti-corrosive metal, analysts said.
"From the middle of this year to the middle of 2007 we will see the market in around 200,000 tonnes of deficit and move into surplus by the end of 2007," analyst Graham Dellor at U.K.-based consultancy CRU said. The market would turn into surplus with Western world zinc projects coming onstream and growing Asian capacity.
This year zinc premiums were seen holding firm in the United States and Europe but were already softening slightly in Asia on rising Chinese output.
Merchants said Special High Grade duty-paid zinc in London Metal Exchange (LME) warehouses in Rotterdam commanded a premium of $290/330 a tonne above the LME cash price, doubling since June earlier this year. "In Europe, stocks are tight so the premiums are relatively high," a physical zinc trader said.
On Wednesday, zinc stocks came in at 159,800 tonnes, down from 234,200 at the start of June and most analysts expected the market to be in deficit until mid-2007.
In the short to medium term European demand was seen strong. "Particularly in Europe the high premium expresses a real physical tightness with a very strong pick-up in the galvanising sector," said an industry analyst, who asked not to be named.
The construction sector in Germany, France and the 10 new member states in the European Union, including Poland, the Baltic States and Hungary, was expected to stay firm. "After Eastern Europe's entrance into the EU the investments into infrastructure has been very intensive, so I expect to see reasonable growth there," the analyst said.
Also, a Pricewaterhouse Coopers Automotive Institute report said global vehicle assembly capacity will grow by 9.1 million units between 2005 and 2010, consuming large amounts of zinc. While western markets will remain tight for the next year or so, supply was increasing in China, analysts said.
"There is more metal available in the Far East...Chinese zinc production is rising - there is no doubt about that," Claire Hassall, co-founder of CHR Metals said.
CRU's Dellor said: "This is not yet apparent in export data as China is a net importer overall, but more Chinese metal is showing up in Asia and that is really what is putting premiums under pressure there." Chinese producers may be tempted to export to Europe, analysts said, attracted by strong premiums as European refined production has fallen by 14 percent from 2002 to 2006.
But the Asian demand picture was less clear. "What is less easy to put the finger on is how strong demand is, there have been some negative reports out on Korea and Japan with some softening of growth rates," Hassall said.
Recent machinery orders in Japan pointed to a slowdown and a pessimistic fourth quarter survey in South Korea indicated a dampening of future demand, Hassall said.
Hassall said a slowdown of economic growth was more likely to dampen demand for zinc than the impact of substitution. "Obviously prices are high and there is a threat of substitution, but I think what is happening to demand is more dependent on global economic factors," Hassall said. Analysts said few consumers had found a way to replace zinc in galvanising, which accounts for 47 percent of zinc use.
"People will have to learn how to use zinc more efficiently rather than simply substitute, as there are still very few alternatives," the industry analyst said. "Galvanised sheet will not see much of substitution, it is easy to pass this cost over to consumers," he added.
Comments
Comments are closed.