Industrial Metals ETPs: Supply and demand dynamics bullish for zinc

May 1st, 2012 | By | Category: Commodities

A long-running global supply glut of zinc, a key metal used in the production of steel, will likely turn to deficit as some of the world’s largest zinc mines run dry.

Global supply and demand dynamics bullish for zinc prices

The world's two largest zinc mines, Teck Resources' Red Dog Mine in Alaska and Minmetals' Century Mine in Australia, are expected to run dry in the next few years.

Zinc is likely to turn into deficit in the next few years as consumption rises in emerging markets (particularly China), steel manufacturing picks up in Europe and North America, Japan continues to recover from the earthquake and tsunami and – most critically – several of the world’s largest zinc-producing mines run dry.

Global demand for refined zinc grew 2.2% to 12.85 million metric tonnes in 2011 and is forecast to grow by 3.9% to 13.35 million tonnes in 2012, according to the International Lead and Zinc Study Group (ILZSG), a UN-mandated organisation

At the same time, the global production of refined zinc increased 2.7% to 13.16 million tonnes in 2011 and is projected to grow by only 2.4% to 13.48 million tonnes in 2012. As a consequence, the surplus of refined zinc is expected to decrease by more than 50% year-over-year to 135,000 tonnes in 2012.

The decline in the surplus has been attributed to the depletion of a number of large mines, with many expected to close over the next few years. Among the mines to be shut down include the world’s largest zinc mine, Teck Resources’ Red Dog Mine (600,000 tonnes per year) in Alaska, the world’s second largest zinc mine, Minmetals’ Century Mine (500,000 tonnes per year) in Australia, Xstrata Zinc’s Brunswick Mine (240,000 tonnes per year) in Canada, Vedanta Resources’ Skorpion Mine (145,000 tonnes per year) in Namibia and other large mines in Canada, Ireland and Peru.


ETFS Physical Zinc ETC (PHZN)

– Simple, cost-efficient and secure exposure to zinc,
100% backed by physical metal stored at approved
London Metal Exchange (LME) Warehouses

– Issued by ETF Securities, a leading provider of
commodity-focused exchange-traded products

– UCITS III compliant, listed on the London Stock
Exchange (LSE), eligible for ISAs and SIPPs

– Fees: Management 0.69%, insurance allowance
0.12%, plus 38 cents/tonne/day warehouse rental fee

Meanwhile, global zinc mine production remains below refined zinc output, with zinc mines forecast to grow by 4.8% to 13.37 million tonnes in 2012.

Xiaojing Yu, CEO of China Shen Zhou, a non-ferrous metals mining company, says: “Data and forecasts from industry authorities suggest that the global zinc market is trending toward a more balanced demand and supply relationship. An improving balance between the global demand and supply is potentially positive for zinc price.”

With zinc supplies heading for a deficit, many analysts expect zinc prices to rise, as reported by Reuters: “While prices are not very good at the moment in zinc, that tightness of supply going forward will drive much better prices,” said Andrew Michelmore, chief executive of Minmetals Resources.

“The turnaround is more about a shortfall in supply than it is about the growth in demand that is occurring,” said Scott Lowe, managing director of Blackthorn Resources, citing analysts as viewing the zinc market heading for the tightest supply conditions in 30 years. “We think we’re on the cusp of a good thing.”

Indeed, a recent research note from RBC Capital Markets backs up these claims: “In 2013 and 2014, we expect mine closures to begin to constrain supply, leaving the market balanced although with inventories at historically high levels. In 2015, we expect a shortage of mine supply to result in a large deficit, drawing inventories down significantly.”

As well as offering upside potential from a performance perspective, zinc also offers considerable diversification benefits. According to data from Signal Financial Group, a portfolio analytics consultancy, Zinc, as traded on the London Metal Exchange (LME), has a correlation of 0.68 with the S&P 500, 0.52 with DAX, 0.63 with the CAC 40, 0.55 with the Hang Seng, 0.33 with gold, and -0.31 with 10-year US Treasury bonds.

Investors are able to gain exposure to zinc via a number of exchange-traded commodity products. For UK-based investors, the following products, which are aimed at sophisticated and professional investors, are worth further investigation:

ETFS Physical Zinc ETC (PHZN)
ETFS Physical Zinc (PHZN) is designed to offer investors a simple, cost-efficient and secure way to access zinc. PHZN is intended to provide investors with a return equivalent to movements in the LME Cash Settlement zinc price less fees. The ETC is backed by physical metal stored at London Metal Exchange (LME) Warehouses, the ownership of which is evidenced by LME Warrants (LME regulated warehouse receipts) or warehouse receipts held by the issuer. The ETC is a debt security issued by ETFS Industrial Metal Limited (IML), which is ring-fenced from ETF Securities. PHZN incurs a management fee of 0.69% pa, an insurance allowance of 0.12% pa and pro-rated 38 cents per tonne per day warehouse rental fee. London (LSE) listed.

ETFS Zinc is an open-ended Exchange Traded Commodity (ETC) designed to track the DJ-UBS Zinc Sub-Index on a total return basis.  The DJ-UBS Zinc Sub-Index is composed of futures contracts on physical zinc. ZINC is a debt security issued by ETFS Commodity Securities Ltd (CSL), which is ring-fenced from ETF Securities. The commodity exposure is obtained from experienced third parties and whose obligations are secured with collateral covering 100% of the outstanding value. The collateral is marked to market daily and held by the collateral manager in a segregated account.  ZINC has a management fee of 0.49% pa. London (LSE) listed.

Source Zinc T-ETC (SZINC GR)
The Source Zinc T-ETC aims to provide the performance of the S&P GSCITM Zinc Index Total Return, based on zinc futures prices. Each T-ETC is a certificate which is secured with US Treasury Bills and cash. The investment return is achieved by entering into collateralised total return swaps with approved swap counterparties. SZINC incurs a management fee of 0.49% pa and a swap fee of 0.45% pa. SZINC is listed on Deutsche Börse (Xetra) but is registered for sale in the UK and has UK Reporting Status.

ETFS Leveraged Zinc ETC (LZIC)
ETFS Leveraged Zinc is a 2x leveraged version of ETFS Zinc (see above). The price of ETFS Leveraged Zinc (LZIC) will change daily by 200% the daily percentage change in the DJ-UBS Zinc Sub-Index (before fees and adjustments) and accrues a daily capitalised interest return. LZIC has a management fee of 0.98% pa. London (LSE) listed.


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