Diecastings made from zinc alloyed with other metals constitute the second most important source for zinc demand. Diecastings account for about 24% of zinc consumption in the U.S. The motor vehicle and appliance markets are once again the most important end markets for diecasting.
The U.S. Commerce Dept. recently estimated that economic growth in the second quarter slumped to an annual rate of 1.7% from 3.7% in the first quarter. The economic expansion that we have enjoyed since late 1982 is clearly faltering despite the fact that capital spending remains strong. The reason is simple; it is called consumer fatigue. After a protracted spending binge, the U.S. consumer is clearly in a mood to pay down debt balances and bolster his savings account. Demand is Tied to Auto Production
The slowing pace of consumer spending constitutes an ominous harbinger for zinc demand. Zinc is perhaps the most consumer-sensitive metal, given the importance of the motor vehicle and household appliance end markets for it. New car sales in the U.S. were down 7.2% in the first half of 1989. Despite the drop in sales, the auto producers were slow to cut back production, and North American vehicle output actually rose 2.2% in the first half. The resultant buildup of inventories has caused the automakers to reduce production plans in the second half to their lowest levels since the last recession. This will hurt zinc demand.
Moreover, the current strength in zinc prices, relative to aluminum prices in particular, is raising renewed fears of substitution. Galvalume, a high-aluminum content substitute for galvanizing, is becoming even more cost-competitive. Steel makers are, however, reluctant to make the capital investment required for a changeover — particularly since demand for galvanized sheet has been so buoyant in recent months. In addition, it is easier to tool with the galvanized coating process.
Fears that diecasters will be tempted to make the capital investment required to switch from the most widely used zinc alloy, Zamak 3, to Al380, an aluminum based alloy, have also been rekindled. The Al380 is more cost-competitive, but the Zamak 3 has better performance characteristics.
The threat of substitution should, however, never be taken lightly. The zinc diecasting market has dropped to 300,000 from 600,000 tonnes per year since the early 1970’s. The aluminum and plastics substituted for zinc have permitted valuable weight savings in the transportation market. The lost market share has proven difficult to regain, even with thin-walled zinc diecastings.
We expect worldwide zinc consumption to be down 2% in 1989 to about 5.1 million tonnes and another 2% in 1990 to about five million tonnes.
We have experienced the usual supply disruptions in zinc this year. Strikes, revolutions and other natural and unnatural disasters all have taken their toll. For example, Curragh Resources was forced to interrupt zinc concentrate shipments from its Faro, Y.T., mine on July 24, when lightning precipitated forest fires which burnt the power transmission lines from Whitehorse to Faro. Even less fortunate was Centromin in Peru. Centromin was forced to curtail production by as much as 45% at some locations this summer when a Marxist guerrilla organization calling itself Shining Path began bombing and other similarly disruptive activities against Centromin’s facilities.
Production at both Curragh and Centromin is, nevertheless, basically back to normal. Producers have been striving to maximize production over the past 12 to 18 months in order to take advantage of the strongest zinc pricing environment ever.Production to Rise
Forecasting the acts of God in all his wisdom and the deeds of man in all his folly is an even more perilous exercise than forecasting economic trends. Nevertheless, we are bravely estimating zinc production will increase 1.5% in 1989 to 5.3 million tonnes worldwide with a further increase to 5.6 million tonnes in 1990. Cominco’s Red Dog mine in Alaska will be a major contributing factor behind the 1990 increase when it comes on-stream next year.
Worldwide producer zinc inventories dropped to a low of 264,000 tonnes midway through 1988 from 490,000 tonnes in early 1987. They have since risen to 343,000 tonnes at the beginning of August. This still represents less than a month of stocks in producers’ hands. The zinc market is therefore still very tight.
We anticipate this tightness will ease somewhat over the next 18 months. And we predict producer stocks will reach 543,000 tonnes by year-end 1989 and 1.1 million tonnes by year-end 1990. This would represent an inventory level equivalent to 2.5 months of shipments. This would be high by recent zinc industry standards but would still be comparatively modest relative to standard industry levels for other metals.
The U.S. producer price of zinc averaged only 34 cents per lb in 1986 and 36 cents in 1987. It rose steadily in response to tightening market conditions to average 57 cents in 1988 and finally peaking at 95 cents in March, 1989. Zinc subsequently weakened to just less than 80 cents in July.
A technical squeeze in the spot market on the London Metal Exchange resulted in an upward price blip to 85 cents in late August. A flood of deliveries into the spot market alleviated this squeeze and the price has now dropped to 80 cents per lb again.
We expect the U.S. producer price to drop to 75 cents by year-end and to drop to 55 cents by year end 1990. Our average price expectation for 1990 is 65 cents .
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