Is Zinc at its Zenith?


Doomed to forever be dead last on the commodities reports thanks to the tyranny of alphabetical order, zinc often goes unnoticed by investors thanks to its clandestine nature.  This base metal usually brings up the rear when it comes to value as well, placing well below lead, tin, and copper on a per-pound basis.  Like many other metals, zinc didn't have a particularly strong 2014 year, peaking at $1.10 per pound before dropping to lows of $.90 per pound by December.  Unlike many other metals, however, 2015 has been the year of zinc as the metal has soared back up to $1.08 per pound to regain nearly all of its losses over the past six months.  For investors looking to make money off of niche metals, this begs the question of whether zinc is at its high point or whether there's still good value left to be had.

Between Two Metals

Some commodities enjoy a close relationship to one another.  When the price of oil goes up, for instance, you can usually expect most foodstuffs to rise in value as well due to the energy cost of growing and transporting everything from wheat to orange juice.  When silver has a strong gain, likewise, you can expect zinc to rise in sympathy since silver represents a major byproduct of zinc mining, a welcome change from byproducts of toxic waste and rubble.  In 2013, the zinc market absolutely crashed, dropping to low points of $.83 per pound that have yet to be reached again, thanks to the bottoming out of the silver market as the precious metal lost a third of its value.  That 33% meant that zinc mining added on an additional $130 of expenses per metric ton of bullion produced, making the base metal far less appealing to mining interests.  A rising price of silver for 2015, having gained $1.50 per ounce in April alone, means a bull market for zinc in tandem.

Peak Production

Demand for zinc usually eclipses supply by about ten percent of production, keeping the metal profitable without ever making it as valuable as semi-precious or precious metals.  This means that overproduction in any of the major mines across the globe rarely results in the metal losing serious value.  During March of 2015, for instance, Peru dug more nearly 25% more zinc out of the ground than they did in March of 2014, but the increased production couldn't put enough of a dent in the global demand to cause zinc to lose value.  With 50 separate nations around the globe producing zinc, it's far from a niche metal like rhodium, which can only be mined in a handful of geologically-rich regions.  As some nations sour on mining output, furthermore, the global trend of lowered output can be seen playing into an investor's favor as demand continually outpaces supply.  The biggest news in terms of zinc mining comes from Australia, a nation already on the ropes regarding much of its mining revenue.  The Century zinc mine, owned by MMG Limited (1208 on the Hong Kong Stock Exchange trading for $3.27 per share) gave word that they would scale down output for the near future.  Zinc futures have risen to $2200 per ton, a ten percent gain in the past month alone, as global stockpiles fell below the 500,000-ton threshold, the first such time the metal has reached the lower limit in five years.  What's more, investment funds on the London Metals Exchange doubled the share of zinc purchased in April.  It's clear that zinc is a hot commodity; it's not clear how much longer it'll remain in the black.

Spending and Scaling

Like many other commodities consumed around the globe, the largest customer for zinc remains the Chinese market.  China has contributed approximately .5% growth per year to the global zinc demand, pushing it to the point where they now consume some 44% of all zinc mined on planet Earth.  While China's economic slowdown has mitigated their purchasing of other base metals, most notably iron, their eager demand for zinc hasn't abated.  A major aspect of zinc consumption lies in the exploding Chinese car industry, as cars require zinc for galvanized metal.  Car sales in China are growing at a double-digit rate thanks to policies enacted by Premier Li Keqiang offering subsidies of about $5000 per vehicle; car ownership has doubled in the past decade.  With the Chinese opening formerly-closed smelting plants to deliver more zinc to their economic lifelines, there's no question that this base metal hasn't seen the end of its good times. 

Letting It All Zinc In

How can you tell when zinc has reached its peak point?  It's clear that there should be a good deal more value left in the metal: zinc has not yet recovered its full value from the 2014 drop and has only been climbing for a month and a half.  In 2014, zinc climbed steadily from March to July before peaking in particularly dramatic fashion.  It's not clear whether another July correction lies on the horizon in two months' time, especially as demand grows steadily and supply appears to be steady at best.  Zinc has been performing where other base metals are lagging, furthermore: iron prices have fallen as copper and aluminum have only enjoyed modest gains at best.  Your decision to invest in zinc should depend on your willingness to take risks on this particular commodity.  While zinc doesn't appear poised for a market correction in the near future, it has also never had more than three month-over-month periods of consistent gains, meaning that the clock could very well be ticking.  Conservative investors may shy away from six-month zinc futures, perhaps even preferring to short the metal, but those who are willing to see how high the ride goes will be able to enjoy value from zinc as the silvery-white metal serves up profits.

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