Tight Zinc supply spells good news for investors, says expert

Zinc prices have doubled due to an evolution in the Chinese steel industry, says expert resource analyst Gavin Wendt.

What is your view on the state of commodities?

Commodities have outperformed most people’s expectations in 2017.

At the start of the year there was a lot of bullishness about Trump, the potential infrastructure spending plans he had to renew the ageing US infrastructure and what that might do for demand of our resources.

That euphoria died away as we saw his policies fail to go through and along with that people started to question China’s growth outlook.

Traders fell out of commodities but they seem to have recovered across the board — it’s hard to think of one commodity that hasn’t performed this year.

Talk us through the performance of our biggest commodities.

If we look at the bulk commodities like iron ore and coal, no one expected that demand would be as resilient as it has been out of China and that prices would have remained as robust as they have been.

As much as BHP, Rio and Fortescue have churned out, China has taken it.

The Chinese steel industry has been resilient and while some inefficient producers have closed down, those that have remained are demanding high qualities of coking coal and iron ore.

We are seeing in China what we saw in Japan in the 70s – when post-war the economy grew and they were producing a better quality product.

Premium iron ore is in demand and Australian commodities are among the best. We are at an advantage to other producers such as Brazil purely because of our proximity and the relationships we have built already.

What commodities are the biggest opportunities?

Base metals such as copper, nickel and zinc were all up strongly in 2017.

Again it’s a demand story. The growing anticipation in the market for new-age uses such as battery storage and electric vehicles have developed a whole new demand spectrum.

Now investors are starting to look ahead further to predict the next big thing.

If we look to the supply side instead, you can’t go past Zinc. Its price has been rising steadily to be up 40 per cent in just 12 months. Since early 2016 prices have doubled and that is increasingly due to the evolution of the Chinese steel industry where it is used to rustproof steel.

A lot of the world’s major zinc mines are closing or in the process of doing so. At the London metal exchange stock piles of zinc have fallen by 77 per cent and are now sitting around 280,000 tonnes compared to 1.2 million just five years ago. That’s proof there really is no spare zinc in the market.

Big players like Glencore have shuttered zinc mines because prices were low and resisted temptation to re-open them. But juniors like Red River Resources (ASX:RVR) have gone into production and are reaping the rewards. Similarly, New Century (ASX:NZCZ) are going back to a century mine of MMG and have done well in their share price too.

Other companies like Altech (ASX:ATC) are value adding by mining bauxite in WA, and processing it in Malaysia to produce high purity alumina used in semiconductors or display screens.

How responsive is the market to supply shortfalls?

A zinc shortfall has been forecast for some time, but we are only now seeing the ramifications of it in the market.

While the knowledge might be out there, speculators won’t buy something until it’s going to move. It’s like waiting for the car crash and until it happens investors won’t react.

You can’t just press the button on a mine — these things take years to appraise, finance and build before you get into production.

While the forecast might have been there ten year ago, it takes longer for the action to happen.

What’s the outlook for commodities for the rest of the year and into 2018?

In terms of the outlook, fundamentals are good — bulks, base metals and gold are well poised.

The US hasn’t raised interest rates like they promised and that has kept their dollar lower which is good for gold.

When it comes down to it, investors know gold and what a good deposit looks like. This gold conglomerate story out of the Pilbara is driving so much interest and has been pumping good money into the industry.

In terms of China, we just had the China communist party congress and we saw a steady-as-she-goes approach. Markets took a significant degree of comfort from it that they will continue to maintain a level of growth and demand for our resources.

At the end of the day, Australia produces the premium stuff and we have a significant location advantage to the world’s biggest consumer of commodities.

Gavin Wendt has been involved in the Australian share market for the past 20 years as a resource analyst. He specialises in researching and evaluating mining and energy companies.

After many years as a broking resources analyst with Intersuisse, Gavin helped establish the Fat Prophets Mining Report in 2005, writing and producing the report until he established MineLife in 2010. MineLife’s core reader group comprises sophisticated investors, finance industry professionals, resource industry executives, retail investors and self-funded retirees.