Is Zinc the Next Copper?
For over two years now, investors have used copper to bet on China's economic boom, leading to a doubling in the price of the metal. On the other hand, zinc has posted more modest gains. But now some investors and analysts are betting that zinc - the perennial underperformer in the base metals space - stands to benefit more from China's future growth.
"Zinc typically tends to generate not-too-positive images in investors' minds," Gavin Wendt, Senior Resources Analyst with investment advisor Mine Life told CNBC on Thursday. But Wendt says zinc's "day in the sun" is coming.
About 50 percent of zinc supplies are used to galvanize steel in order to prevent rusting. Wendt believes that as Chinese steel producers begin producing higher quality steel, they will increase their consumption of zinc.
The problem is that the zinc market remains heavily oversupplied. According to the Lisbon-based International Lead and Zinc Study Group, the global zinc market had a surplus of 263,000 tons in just the first eight months of the year. That's one reason zinc prices have fallen 28 percent year-to-date, about the same amount as copper.
Jeremy Friesen, Asia Commodity Strategist with Societe Generale, says the oversupply is one reason why he is more bullish on copper than zinc at current levels.
But, others point out that Zinc's excess supply could disappear over the next few years. According to Fat Prophets, an Australia-based research firm and money manager, a number of large zinc mines are coming to the end of their life cycle and are set to be closed down over the next few years. Among these is Century, one of the world's biggest zinc mines with an annual capacity of 500,000 tons which is scheduled to be closed in 2014. Fat Prophets says Century's closing alone will be enough to wipe out the entire surplus for this year.
The firm believes that as long as China doesn't experience a "hard landing", and demand remains strong, zinc could see big gains because of the reduction in supply.
There are, of course, new mines that are coming online such as Goldcorp's silver-zinc Penasquito project in Mexico. But Mine Life's Wendt says bigger miners who could bring much more capacity online continue to steer clear of the zinc business.
"The heavyweight miners like BHP and Rio Tinto, typically have stayed away from the market because they don't tend to see that it's a commodity that will perform strongly throughout the economic cycle. They tend to involve themselves in commodities like iron ore and coal, where they see fairly steady demand, where they have a major control over the market," Wendt said.
Wendt believes investors should bet on zinc by using exchange traded funds rather than betting on shares of zinc producers such as Anglo-Swiss miner Xstrata and Canada's Teck Cominco.
"(With ETFs) you don't have exposure to the vagaries of the share market where investors get nervous and start selling equities. The way we've seen with gold prices....the physical metal outperforms the companies that actually are involved in processing," he said.