September/October 1991
An independent zinc die-cast alloyer offers an assessment of current market conditions and potential directions for the future.
By David Fink
David Fink is treasurer of Allied Metal Co. (Chicago).
Zinc, like all of the commodities, is feeling the zap of a recessionary economy. Demand has dwindled, supplies have expanded, and prices have dipped. Nevertheless, like other commodities, zinc can zing back from its current predicament--if only the world's economy would improve.
In fact, two of the metal's major markets are industries used as primary gauges of the general economy: automotive and construction, which have seen reduced activity in recent months compared with the boom years of the late 1980s. As a result, zinc demand has tapered, with some domestic producers reporting that total U.S. demand is down 30 percent from 1989 levels and worldwide demand is off 15 percent.
When will demand improve? There are as many predictions as to what will signal a turnaround as there are optimists in the zinc community, but, at Allied Metal, we rely heavily on automotive indicators. Thus, we're looking forward to some recovery in demand through the rest of 1991 as the car companies come out of their traditional summer slump and begin production of 1992 models. Still, until the economy returns to a healthier position, prompting people to buy new cars, demand for zinc--at least in North America--may be less than inspiring.
There's Material Out There
On the supply side, although every zinc, producer and trader gives a different assessment of supplies, the one thing that seems certain is that there's a glut of slab zinc on the market. According to data available this summer, zinc inventories in the Western World in May were 22 percent above last year's comparable figures and 20 percent above "normal." And stocks in the London Metal Exchange (LME) warehouse showed an upward progression throughout the summer.
While some of Allied's suppliers of special high grade (SHG) are reporting that supplies are tightening worldwide, zinc still appears plentiful. This assumption is based on two unscientific reasons. For one thing, it's easy to buy the metal for prompt delivery; every supplier seems to physically have zinc that they are happy to sell. Furthermore, we receive daily phone calls from traders and producers seeking to move SHG. No matter what is said or written to the contrary, if the phone keeps ringing, there must be material out there.
Prices Low but Stable
Considering the current state of zinc supply and demand, it should come as no surprise that prices have been relatively low. In fact, not only has the LME price for SHG--on which prices have been based since last year--fallen in recent months, but so have the domestic premiums above the LME price--which are based ostensibly on market fundamentals as well as freight and determine the actual price that must be paid. About a year ago, for example, premiums were approximately 6 cents above the LME, but market conditions forced them down to 1 cent above the LME this summer.
If demand picks up as expected through the rest of this year, premiums above the LME also should rise slightly from their present levels, perhaps reaching 2 1/2 cents by the end of 1991. Even this level, however, is not enough to stimulate increased imports from Europe, which faded when the size of premiums dropped. Premiums less than 4 or 5 cents above the LME simply aren't high enough to cover the freight costs between Europe and the United States.
What has been surprising about recent zinc prices is the relative stability they've seen on the LME. The LME price fell to 49 cents per pound for September delivery earlier this summer, and hovered around this level for months, fluctuating only a few cents. Such price stability is unusual for the inherently volatile LME, which can easily move in large increments--say, 3 cents in a day--without any noticeable changes in physical market conditions. Fluctuations in the future, therefore, can't be ruled out, especially when you consider that the positions taken by speculators and fund managers who have no idea what zinc is can have, a significant impact on the market.
While many in the zinc business may long for the greater stability of the producer price, it looks as if LME pricing is here to stay. What kinds of prices will the LME offer? Although supply and demand conditions indicate that pricing could continue to drop, there seems to be some resistance to prices falling below $1,050 per metric ton (a little less than 49 cents per pound)--the level recognized as the break-even point for integrated zinc producers. If prices do fall below this figure, they may drop dramatically and large losses will mount. Nevertheless, retrospective logic dictates that LME prices may begin to rise in late September or early October and that we could see zinc selling for 55 cents per pound by year's end.
This may not be the zenith level many hope for, but it should show that zinc hasn't completely lost its zing.•
An independent zinc die-cast alloyer offers an assessment of current market conditions and potential directions for the future.