Auto sector factor in projected growth in demand for zinc, lead

In its Annual Review of the World Lead and Zinc Industries 1989, Shearson Lehman Hutton reports zinc will also benefit from demand in the construction industry.

Despite the improved demand, prices for both base metals are expected to drift lower.

“While our fundamental analysis suggests the zinc market will remain tight, we still believe prices will trend lower over the forecast period,” Shearson researchers project for the next 18 months.

“Even though prices are well off the recent highs, they are (at around $1,700(US) per tonne at the time of the report) at unsustainable levels from any long-term perspective. Another factor that will drag prices down is the likely poor performance of the other metals.”

The firm is calling for the metal to average $1,600 during the second half, and about $1,710 for the year. “Although a further decline to $1,400 per tonne is forecast for 1990, one should remember this is nearly double the level recorded in 1987,” write the researchers.

Zinc in London in 1988 averaged 56 cents per lb, and in 1987, 36 cents . To the end of June, the metal was averaging about 81 cents .

The metal’s rust-fighting ability has made it a favorite in the galvanized steel industry, in particular in the automobile and construction sectors.

Shearson says demand from diecasters is likely to ease following last year’s strong performance. Fears of substitution have entered that market.

The net flow of zinc from West to East should increase because of the restrictions on Chinese exports, the researchers predict.

Assuming a modest recovery in Peruvian output, non-communist concentrate production is forecast to rise in 1989 by 3.1%. That output is expected to increase by 5.8% in 1990 with the huge Red Dog project in Alaska coming on stream and an expansion in Australia making itself felt.

For 1989, demand for zinc is expected to outstrip supply. In 1990, the company expects a rough balance between the two, although stocks are expected to remain low by historical standards.

“Zinc consumption grew for the sixth year in a row in 1988, expanding by 5.1% to a new high of 5.3 million tonnes,” writes Shearson.

“A notable feature was that for the first time since 1983, growth in the industrialized countries exceeded that of the newly industrializing and developing countries. We believe the level of economic activity will be reasonably favorable for the base metals in 1989-90.”

As for lead, Shearson says the metal’s market performance since the beginning of 1987 has been disappointing compared with other base metals.

“Prices have rallied in recent months; this has not been accompanied by a corresponding improvement in the fundamentals,” the firm writes. “Therefore, unless there is a surge in speculative interest, prices are forecast to drift lower in the second half of the year.

“However, the implied build-up in inventories, certainly in 1989, should not put prices under too much pressure. The inventory build-up in 1990 is potentially more worrying and the downtrend in prices is forecast to continue, although they should remain at attractive levels for producers.”

Lead averaged 30 cents (US) per lb in London last year, and 27 cents in 1987. To the end of June, the metal was averaging about 28.5 cents .

The metal has been a favorite of battery-makers. (Batteries account for 60% of the metal’s total offtake.) According to Shearson, higher car production this year and the ever growing vehicle population should help to underpin modest consumption growth to the end of 1990.

Environmental concerns will adversely affect end-uses such as gasoline and paints.

Higher operating rates in Australia and the United States should help lift primary refined production by 3% in 1989 and 1.7% next year, Shearson says. Also, secondary lead production is expected to continue its recovery.

Supply is forecast to overtake demand as the year develops, with further market deterioration foreseen in 1990. Inventories, however, are forecast to remain at relatively low levels.

Lead consumption has risen for six consecutive years; however, year-on-year increases have generally been low, usually less than 2%, Shearson writes. Last year it grew by 1.7%, taking it to a new high of 4.33 million tonnes.

With regards to market balance, Shearson points out the level of lead inventories, representing about five weeks’ consumption, has not changed since 1986.

“In our view, supply has now caught up with, and overtaken, demand,” Shearson writes. “We are looking for a surplus of 25,000 tonnes this year, followed by a 65,000-tonne surplus in 1990.”

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