Analysts Divided Over 2008 Zinc Prices due to China's Uncertain Impact

SHANGHAI (Interfax-China) -- Analysts have released varying forecasts for zinc prices this year as China's impact is undetermined, although all agree that zinc will be in surplus globally for the first time in years.

Despite predictions that zinc this year will be in surplus for the first time since 2003, a geographical gap between zinc concentrate supply and refined zinc smelting capacity is a factor expected to push up zinc prices on the London Metal Exchange, according to the latest analysis from CHR Metals.

A big surplus in global zinc concentrate supply is expected this year, despite disruptions from mining project delays and cancellations. "But the situation is that the major zinc concentrate suppliers are outside China, while the major zinc smelting capacity is inside China. We expect the global zinc market, China excluded, will experience a slight shortage, while China's domestic market will be approximately 100,000 tonnes in surplus this year," Claire Hassall, a CHR Metals analyst, told Interfax today.

China's zinc refining capacity grew 13% on an annual basis last year, dwarfing developments elsewhere in the world, and is expected to grow twice as fast as the rest of the world this year. This means that mines outside China will need even greater access to Chinese smelting capacity, CHR Metals said.

Zinc concentrate production will lift 9.6% from last year to 11.26 million tonnes this year, mainly from increased production in Bolivia, Australia, Canada and Peru, following a mining rush last year when zinc prices were high, Beijing Antaike Information told Interfax.

In addition, concern over a possible export tax on 0# refined zinc (>=99.995%), as well as the tax itself, may reduce zinc exports from China and further tighten the global refined zinc market.

China's previous export tax changes caused global zinc supply to dip by 250,000 tonnes last year.

Hassall predicted that the average LME zinc price will stand at around $2,500 per tonne in 2008.

However, some analysts still harbour downside predictions for zinc prices this year. According to a prediction by BNP Baribas, the global zinc market in 2008 will move into significant surplus, as supply from new projects and expansions comes on-stream, while China's possible export tax hikes on super high-grade zinc (0#zinc) will keep more metal off the global market and limit the fall on the LME.

UBS predicts that zinc prices will stabilize at around current levels in the short term, and the significant supply response expected from western producers in 2007 will put the market into surplus. However, China's growing zinc concentrate imports, as the country expands its galvanized steel capacity, will provide support for zinc prices in the long run.

The three-month zinc contract on the LME closed at $2,260 per tonne yesterday, down 2.26% from the previous trading day, while the most traded April 2008 zinc contract on the Shanghai Futures Exchange closed at RMB 18,790 ($2,607.37) per tonne today, down 0.05% from yesterday.

China increased the export tax on unwrought zinc (2#zinc<99.99%) from 5% to 10% on 1 June 2007, and raised it again to 15% on 1 January this year. Currently, 0#zinc enjoys a 5% value-added tax (VAT) export rebate. There is also a 5% export tax on 1#zinc.

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