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Bearish View on Zinc Prices Through 2010

A supply overhang, demand uncertainties, and inventory buildup imparts a bearish outlook for zinc prices through 2010.

NEW YORK (TheStreet) -- Zinc prices likely will be weighed down by recent supply additions, growing demand concerns and inventory buildup. We anticipate Horsehead Holding (ZINC) , the largest zinc producer in the U.S., to remain under pressure for a few weeks.

Restart of idled zinc capacities has continued this year, further increasing the metal's supply. The global zinc market is headed toward a surplus of nearly 418,000 tons this year, up from the earlier forecast of 227,000 tons due to production restarts and expansions, according to the International Lead and Zinc Study Group.

Teck Resources

(TCK)

is going ahead with the scheduled expansion at Alaska's Red Dog, the world's largest zinc mine.

Nyrstar

, the world's largest zinc producer, is continuing with restarts after reporting a 16% quarter-over-quarter output increase during the first quarter. Meanwhile,

Meridian Minerals

is expanding the zinc-lead resource at its Lennard Shelf project in Western Australia and

Glencore

has reopened the abandoned Iscaycruz mine, the largest zinc-lead mine in Peru.

Further, demand uncertainties are mounting

on recent concerns related to slowing metal demand from China

, the top consumer of the metal, on top of the debt crisis in Europe. Zinc inventories on the Shanghai Futures Exchange increased 14% to 295,234 tons in May from 259,197 tons in April, a staggering 255% increase from May 2009. Meanwhile, the buildup in London Metal Exchange zinc inventories was 12% to 619,000 tons in May from 552,525 tons in April, continuing the record uptrend on the LME as well.

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Demand from the galvanized steel sector, accounting for nearly half of zinc consumption, is yet to reach the growth levels of crude steel. Overall, demand is likely to rebound by 6% in 2010, in comparison with the 5.2% decline last year. Global zinc demand was up 24% year over year in the first quarter; the growth looks impressive because of a small base a year ago when demand was poor.

Currently, LME zinc spot prices were trading at about $1,689 per MT. In the fourth quarter of 2010, zinc average spot prices on the LME are forecast at 34% to reach $2,265 per MT, according to analysts polled by

Bloomberg

. Given the current inventory buildup and capacity additions, we believe the consensus price estimates could see a downward revision.

Year to date, zinc prices are down nearly 33.2%, making the metal the worst performer among base metals. In comparison, copper, aluminum, and lead declined by 13.1%, 12.7% and 30.7%, respectively, while nickel prices are up by 2.4%.

Horsehead Holding

Horsehead Holding, the largest zinc producer in the U.S. and a leading manufacturer of value-added zinc products, dominates the recycling electric arc furnace dust manufacturing. Currently the stock is trading at $8.11, below its 50-day moving average of $11.19 and 200-day moving average of $11.37. The downtrend in Horsehead will likely continue in the upcoming few weeks. However, the stock will rebound to earlier levels based on the relative competitive advantage of the company.

The acquisition of Inmetco to recycle nickel and other industrial waste has diversified the company's metal exposure. Additionally, Horsehead is weighing options to diversify in Asia. The company captured 70% of the market share of available EAF dust and 90% of all dust recycled.

Analysts at Capstone investments believe that Horesehead could acquire smaller dust contracts from private players. The expertise in high-temperature hazardous metals' recovery and a strong balance sheet will enable the company to scale up its position in environmental services.

Year to date, the stock shed 36.4% contrasted with 33.2% decline in the LME spot price of the metal. In comparison, ETFS Zinc, an exchange-traded fund in London, declined 34.3%.

According to analysts polled by

Bloomberg

, Horsehead Holding is set to report earnings of 81 cents a share for 2010, and $1.05 a share for 2011, a significant turnaround from a loss of 73 cents a share in 2009. Currently, the stock has three buy, two hold, and no sell ratings, according to

The Street's

Analyst ratings guide.