Recent strength may work to zinc’s disadvantage

Like producers of most base metals, zinc producers have enjoyed three years of strong markets and exceptionally high prices. Based on past experience, however, recent high prices may turn out to have caused some damage to future growth prospects. When prices rose briefly to very high levels in 1974, the result was an acceleration in the process of reducing the usage of zinc diecastings in cars. In the current cycle, worldwide zinc consumption actually peaked in 1988 and then dropped about 1.1% in 1989.

For 1990, although consumption was actually up 1% in the first eight months of the year, the sharp slowdown in economic activity in recent months, particularly in the U.S., will result in consumption for the full year — being flat at best. Based on current economic prospects, the zinc industry will probably be fortunate if demand remains at the 1990 level in 1991.

Zinc’s demand growth has been mainly dependent on growth of galvanizing. In 1973, when reported zinc consumption reached 4.8 million tonnes, a level that was not exceeded until 1986, galvanizing accounted for about one-third of the total, while diecasting was about 26%. Currently, galvanizing accounts for about 47% of zinc consumption, while diecasting has dropped to about 18%.

Future growth is likely to depend mainly on further development of the galvanizing sector, which broadly covers all zinc-coated steel such as galvalume and galfan.

An important factor in recent demand growth has been increasing usage in automobiles as consumers have come to expect a longer rust- free life from their cars.

While steel companies are continuing to invest in new galvanizing capacity, this does not automatically guarantee zinc demand growth. In addition to consumer expectations on quality and price, other concerns facing automotive companies are energy efficiency and recycling ability.

Competing products such as aluminum will be trying hard to gain market share at the expense of steel and zinc. Reliability of supply and “reasonable” prices will be important considerations for the automotive sector’s continued growth in demand for zinc.

Automobiles, however, only account for about 20% of the galvanizing market. Construction accounts for the other 80%, with a substantial portion believed to be price sensitive. In the short term, the outlook for this sector cannot be viewed as positive, given current economic conditions. Longer- term growth, however, should resume once economic expansion gets under way.

In 1990, zinc production fell well below earlier forecasts. In Canada, mine production was reduced by the closure for much of the year of the Sullivan mine of Cominco (TSE) because of a labor dispute and by a strike at Brunswick Mining and Smelting (TSE) operations throughout the second half of the year. The latter did not result in a complete shutdown since supervisory and management personnel kept the mine operating at about 25% of capacity.

In Alaska, Cominco’s Red Dog mine encountered startup difficulties and, as a result, produced less than expected. As usual, Peruvian production was also disrupted by a number of strikes during the year. On the other hand, Australian production reached a record high with the startup of two new mines and higher output from the Hellyer mine of Cominco’s 46% owned affiliate, Aberfoyle.

Metal production also fell below expectations, in particular as a result of Cominco’s serious production problems at Trail, B.C., that cut output to about two-thirds normal.

The Trail problems were caused by the need to modify the plant in preparation for the Red Dog concentrates, as well as by poor metallurgical results that resulted from the need to treat a variety of different concentrates as opposed to Trail’s traditional blend of Sullivan and high-purity Pine Point concentrate. The latter has now all been treated. The CEZ plant of Noranda (TSE) near Montreal also ran below capacity for much of the year.

For 1991, barring further unusually large disruptions, mine production of zinc should rise by at least 200,000 tonnes, reflecting higher output from new mines such as Red Dog and an assumed settlement at Brunswick.

Metal production, however, is forecast to rise by only 130,000 tonnes. In part, this will be the result of tightness in concentrate supplies early in the year that are the consequence of the disruptions in 1990. Thereafter, metal production should rise more significantly following the arrival of next year’s shipments for the Arctic.

After allowing for secondary production and a small volume of imports from the former Eastern Block countries, a surplus of about 160,000 tonnes is forecast for the year. Although such a surplus would only restore inventories to a level previously viewed as normal, it would in all probability cause prices to settle back to the US50 cents- per-lb. range, a situation that will probably persist into 1992.

At the same time, zinc producers face rising costs for energy and labor. An additional consideration will be concentrate treatment terms which to date have not been settled for 1991. Spot terms have risen from the low levels experienced last summer and any further increase would place further pressure on the mines, albeit to the benefit of smelters.

In conclusion, zinc producers face a period of lower profitability or even losses for higher-cost operations. On the other hand, their longer-term prospects will probably be enhanced by a period of stable prices and plentiful supplies.005 0000,0606 Patrick Mars is president of the securities firm Bunting Warburg of Toronto.