Prices may go up on supply constraints

Prices for zinc, used to rust-proof steel, may average 35 per cent more this year, beating other industrial metals such as copper and nickel, because of supply constraints, RBC Capital Markets said.

The metal may average $2.00 a pound, or $4,409 a metric tonne, in 2007, from last year's average of $1.48 a pound, analysts led by Toronto-based Fraser Phillips said in a January 11 report. The forecast is 33 per cent higher than its October 27 estimate.

Zinc more than doubled last year. It rose to a record $4,515 on the London Metal Exchange on November 9 and was the second-best performing commodity in 2006 as output lagged behind demand led by China, the world's biggest consumer of the metal.

"Zinc demand looks set to be constrained by supply in 2007,'' said the analysts at the investment-banking unit of Canada's biggest lender. "We expect the market to remain extremely tight throughout our forecast period, leading to sustained high prices."

Zinc for delivery in three months rose $10, or 0.3 per cent, to $3,660 a tonne on the LME. Prices of industrial metals have soared in the past three years, partly as China's booming economy stokes demand for the raw materials needed for factories, cars and appliances. Nickel more than doubled while copper gained 44 per cent last year. China's economy expanded 10.4 per cent in the third quarter.

Goldman Sachs JBWere Pty said January 11 that zinc may average $1.88 a pound in the first half, 6.5 per cent lower than its previous forecast of $2.01 a pound. It left its forecast at $1.81 for the second half.

The market had a deficit of 442,000 tonne of the metal in 2006, and hidden inventories are largely depleted, RBC Capital said. Global demand will grow 2.4 per cent in 2007 and 5 per cent in 2008, according to the report.

One risk could be substitution of alternative metals when consumers are faced with sustained high prices, the report said. Zinc production will remain constrained by lack of mine supply for the short term and smelting capacity could become a constraint later in the decade, RBC Capital said.

"The one wild card remains with China, where continued strong mine production growth could push the market toward balance,'' the analysts said.

The bank expects supply to grow by 6.6 per cent this year and 5.4 per cent in 2008. By 2010, there will be a net increase in supply of 2.7 million tonne after considering cutbacks and closure of existing plants, including Xstrata Plc's Brunswick mine, the report said.

LME-monitored inventory that can be tapped by consumers to fill the production shortfall are estimated to be only 3.3 weeks of consumption, a record low level, RBC Capital said.

RBC Capital, part of the 137-year-old Toronto-based Royal Bank of Canada, forecast prices of zinc may average $1.85 in 2008, $1.75 in 2009 and $1.90 a pound the following year, the bank said in the report.