The slowdown in zinc mine production has begun. We think there is reason to be bullish on a 12-month view, but don’t expect a sustained move higher in prices until mid-2014, said Barclays Capital in a research note.

 

For some time now there has been a much talked about and widely anticipated tightening in zinc mine production that so far has failed to transpire. But with global zinc mine production growth trending lower and Glencore’s production results showing a 12% y/y decline in zinc production, is this story finally beginning to take shape?

 

Data from the International Lead and Zinc Study Group (ILZG) show that global zinc mine production growth is trending lower and is flat y/y in the year to August. Mine production ex-China is down 2% y/y in the same period though it did recover to grow 4% y/y in August. Glencore’s Q3 13 results showed that its zinc mine production dropped 12% y/y (in line with expectations) due to the shuttering of two big mines – Perseverance and Brunswick. These mines will remove a total of 300Ktpy from global supply and mark the beginning of what needs to happen for a bullish zinc story to take shape, in our view.

 

Supply growth from mines like Bracemac McLeod, Peroka and Velardena (total 295Ktpy) will, in the short term, offset losses from attrition. But there is now little slack should these mines not perform. The other big swing factor is Chinese mine production. To get bullish, it needs to weaken considerably. Unfortunately, the sector is opaque and for the past few years it has consistently surprised to the upside. Growth has slowed from 25% in 2012, but at 11% y/y YTD it is still strong. There is also an ample global concentrate surplus which would provide some buffer, albeit only short term.

 

"We think there are reasons to be bullish on zinc prices on a 12-month view, but we don’t expect a sustained move higher to develop until mid-2014. We see more than 15% upside for zinc prices between now and the end of 2014, albeit with most of that happening in H2 14 with Q4 14 prices forecast to average $2,200/t. We also think the downside for prices is limited with cost-support demonstrated around $1,700/t. So the question of whether to go long zinc is a question of timing," Barclays concluded.