Current market climate
Over the past nine months, zinc and lead spot prices have declined 26 per cent as a result of a long-term market surplus that has negated demand for the base metals worldwide.
The impact of this surplus is manifesting itself in myriad forms – mine closures, decreased production, and faltering stock prices. This week, Australian mining company Intec decided to convert its Tasmanian Hellyer Zinc Mine to maintenance only, resulting in job losses for all but a few essential employees. It cannot run the mine at a profit in light of decreasing demand and high production costs. This is the fourth mine closure in Australia in the past six months, and it represents a worrying trend in zinc and lead commodity futures. However, there are some positive developments with regard to zinc production, particularly in China, that will stabilize supply of the metal.
Zinc production in China going up despite surplus
Chinese smelters are evening out the supply of zinc, stepping up production despite a decrease in demand. This production increase eases worries about available supply of zinc, and offsets mine closures and decreased outputs in other parts of the world. Yunna Hadong is the major supplier of zinc and lead in China, and it is choosing to escalate output despite low return on these metals.
The current market trend toward weakening commodity returns is impacting investors, according to Michael K. Smith, President of T & K Futures & Options. “People have gotten very worried about demand for commodities because of this global meltdown,” he notes. “If all these major economies are going to slow down, people think this is really bad news.”
The current spot prices for zinc and lead are low but stable, with minor increases and decreases. As of September 2008, the price of lead is 0.8174 (low) to 0.8288 (high), with an increase of + 1.66 per cent. With respect to zinc, prices for Sept. 2008 are down 0.55 per cent, with spot prices at a low of 0.7755 to a high of 0.7846.
Lead and zinc production levels remain in balance due to slight increases of lead output, primarily by Chinese smelters. Recent, small increases in spot prices for lead might be deceptive, as they could indicate an initiative by manufacturers to restore proper inventory in the world market, rather than demand from end-users and investors.
The Canadian picture: One company to watch
While zinc and lead are not strong contenders in the current commodities market, a long-term outlook on investing in Canadian companies that mine and manufacture these base metals, may reap benefits in the future:
Teck Cominco (TCK): This Canadian mining company is well diversified, and produces many base metals, including aluminum, which is strong in the current market. Its production of zinc and lead may not sound enticing to investors at present. But this company is involved in some interesting oil sands developments. Current stock price for Teck Cominco is CD$40.08 (Toronto Stock Exchange, and US$ 36.14(NYSE).
Although Teck Cominco stock has suffered setbacks recently, the company is still viewed as having many positives that will strengthen prices in the long-term. For more information about Canadian companies that produce lead and zinc, please read this Lead Investing News commentary