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Ardent Listener
Administrator
USA
4841 Posts |
 Posted - 12/01/2006 : 19:52:36
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But why are zinc prices not already higher--high enough to slow down the inventory drawdown to sustainable levels? What explains why zinc inventory drawdowns are seemingly not affected by the existing high zinc prices? How much higher do zinc prices need to go? What is going on in the zinc market?
About 60% of zinc is used is galvanized steel. Zinc is about 3% by weight of galvanized steel, on average. Since zinc is a minor ingredient in steel, the market can sustain and tolerate and absorb substantial price increases. I explained this previously, in my article where I noted that zinc was up by "60% in 60 days!"
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So, moderately higher prices will not significantly slow down demand, and are already high enough to stimulate explorers and investors--even though it takes years to set up a large scale mining operation like you see on "Modern Marvels".
But here's something else to consider.
How much zinc is traded on the spot market verses the futures markets? I don't know. Derivatives can be a big problem, and in my opinion, may be thwarting the free market process whereby higher prices are supposed to cause reduced demand.
Perhaps many end users are not paying $2/lb. for zinc at all! Perhaps many end users are still only paying about 50 cents per pound of zinc! And thus, there is still little incentive for many zinc consumers to conserve zinc usage. How is this possible? Stupid miners hedged!
Apex Silver and Penoles are two miners that I know of that have hedged zinc. But how widespread was this practice, and how much damage has it caused, and will it yet cause? I don't yet know, but perhaps someone else will find out.
Apex Silver hedged, 358,150 tonnes of zinc x x 2204lbs./tonne = 789 million pounds.
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Since Apex hedged zinc at around $.48/lb., at $2.04/lb. for zinc, that's a mark-to-market loss of $1.56/lb., or $1.2 billion dollars, since Apex still has not yet started to mine any zinc. That's a larger loss than the market cap of Apex Silver! Apex also has losses on the silver and lead. Apex also sold 1/3 of their hedging liability, and 1/3 of their project to Sumitomo. Apex has not yet covered the majority of their hedges, claiming that their future losses will be realized as they come due, since they hedged 358,150 tonnes of zinc, silver, and lead for up to 7 years.
So, Apex may be providing zinc to the market at well below free market prices, about 51,000 tonnes per year, at $.50/lb., for the next 7 years. Perhaps some fortunate end user who will have a tremendous competitive advantage since they will not only get zinc cheaply, but also hopefully won't have to stand in line to get zinc during a time of crisis!
Perhaps this partly explains the upcoming disaster unfolding in the world wide zinc market
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If you can conceive it and believe it, you can achieve it. -Napoleon Hill
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 12/01/2006 : 20:11:36
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It took several years for copper to go from $1.50 to $3 per pound, zinc is just behaving like all base metals, taking its own sweet time to increase in price. It is just as well that zinc isn't going up too fast too soon, or else demand might drop and a supply glut might occur.
Of course, we would all love to see our base metal hoards quintuple in price in a few months, but let us not mistreat the golden (base metal?) goose by wishing for a meteoric price rise. Whatever goes up fast comes down even faster. |
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Zinc data
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