Category Archives: Zinc


Commodities: Stick To The Fundamentals, Beware Of Speculation

  • Oil prices are increasing the number of rigs, putting pressure on prices.
  • Soros sold his gold, should you?
  • Iron ore is hot, but waiting until winter might provide better purchasing opportunities.


Yesterday we discussed how Treasury Inflation-Protection Securities (or TIPS) are a great protection during times of inflation. Today we are going to take a deeper look into another great inflationary protection, commodities.

The general feeling is that commodities have surged since January, but there is a high level of divergence. This divergence in commodity price movements is due to speculation in some commodities and fundamental reasons in others.

Situation – Oil

Oil is currently trading at $46 per barrel which is 75% higher than it was at its low six months ago.

figure 1 oil prices
Figure 1: Oil prices. Source: Bloomberg.

The 75% price jump in oil is a clear indication of price speculation in oil markets because the demand is stable and well known. Speculators include the whole chain, from producers to retailers and future traders who can trade high quantities on margin. In such an environment, the only option is to make an educated guess about the long-term fundamental oil price and trade around it. As Russia and Saudi Arabia are in talks to stabilize the oil market, we could see the market push through year highs, but higher prices call for more global production. As oil prices stabilized above $40, the number of U.S. rigs increased for seven consecutive weeks and the global rig count also increased in July. More rigs mean more supply and further pressure on oil prices.

Investors should be careful with oil, production is very flexible and much of it is low cost which disables a higher level price stabilization. Therefore, oil is a pure trading play with fundamentals easily influenced by speculation.

Situation – Metals

As we discussed gold yesterday while discussing traditional safe haven assets, today we are going to focus on iron ore, copper, zinc and aluminum.

An additional warning for those long gold, George Soros, the legendary hedge fund manager that opened a $263 million position in Barrick Gold in Q1 has cashed out in Q2. Be careful not to get burned on gold as smart money is slowly leaving the playing field.

Iron Ore

Iron ore has had a wild ride this year, but its supply is much less flexible than oil and divergence from fundamentals can be easier to grasp.

figure 2 iron ore
Figure 2: Iron ore prices. Source: Bloomberg.

As iron ore is more predictable than oil, Morgan Stanley sees seasonal weakness ahead, increased supply due to the VALE S11D project, and suggests that prices might fall back to $40 again. Those dips are excellent opportunities to open a position in iron ore miners as when iron ore prices are low, their share prices also decline. By looking at the lowest cost producers, share price is the main risk factor as in the long run, big, low cost miners are unavoidable for global development. Companies to look at are Rio Tinto (RIO), BHP Billiton (BHP), Vale (VALE) and Glencore (GLNCY), but for lower risk it might be better to wait for winter.

Aluminum & Copper

Aluminum is only up 8% year-to-date, and copper is only up 3%. Both metals are a clear example of how commodities diverge. This divergence is what creates opportunity because lower prices tend to eliminate high cost production, limiting supply and pushing prices up again. The current price stability for aluminum and copper, and price increases for precious metals and iron, suggests that the 5-year commodity bear market has come to an end and things should slowly turn as we begin to run into supply deficits due to lower investments.

Aluminum and copper are closely related to global economic growth. An good aluminum play is Alcoa Inc. (AA), while with copper it’s good to look at the lowest cost producers.

figure 3 copper costs
Figure 3: Copper production costs. Source: Southern Copper Corporation (SCCO).

The production cost for the stock pick detailed in The Copper Goldmine—a report I wrote earlier this year, along with an update, that was sent to subscribers last Friday—was $0.92 per copper pound in Q2 2016, and is expected to be $0.52 for the company’s future copper project putting it among the lowest quintile in terms of production costs. To download this report, click here.


Zinc is the superstar metal of the year. It has increased by more than 50% year-to-date and is expected to increase more due to the inevitable supply gap forming. More about the zinc supply gap here.

In addition to our above mentioned stock pick—which is transitioning from a mostly copper producer to a mostly zinc producer in 2017,—another good option to be exposed to zinc, copper and aluminum is the PowerShares DB Base Metals Fund (DBB) with equal weights for zinc, copper and aluminum.


Commodities seem to have reached a bottom, but global economic turmoil or China slowing down might ignite speculators to short metals on margin and put severe downward pressure on prices. Therefore, any commodity related investment has to be done with the notion in mind that 50% of it can quickly be lost.

On the other hand, the world cannot live without commodities and therefore it’s a good idea to be exposed to such an investment, especially to miners as their prices increase exponentially if commodity prices increase due to their fixed costs. Production costs are always the main factor in assessing how much can be lost when investing in commodities.

A good strategy with commodities at this point in the commodity cycle is to average down if commodities experience further declines and then ride in full the eventual upside. The upside is certain as global demand for commodities is expected to grow as a result of increasing demand from developing countries.

To sum things up, commodities are at or near their bottom. The upside impetuses to be aware of are growing global demand, limited supply and potential inflation, while downside risks come from an eventual slowdown in China or a global recession.


Will A Bet On Commodities Pay Now?

  • Iron ore prices are falling as supply continues to grow, while copper and zinc prices show signs of supply gaps forming.
  • Low exploration and discoveries indicate that metals will be winners again in the future.
  • The possibility of future inflation increases the appeal of commodities.


Diversification is the ultimate protection against various economic factors, in recessions you might want to hold gold or treasuries, in inflationary times you want to be long stocks and commodities. Therefore it is very important to always know what is happening in each potential diversification sector.

Three weeks ago we discussed how aluminum is a bet on global transportation and while a supply gap is not the issue, productions costs are. In this article we are going to analyze what is currently going on with iron, copper and zinc. Before we analyze each individual metal, there is one very important trend in the mining sector which will affect all three metals, low prices which minimize exploration investments and new discoveries.

figure 1 discoveries
Figure 1: Expenditures and mineral discoveries. Source: Rio Tinto.


The low number of new discoveries means that sometime in the future there will be a new supply gap like the one we experienced in 2011. It is too early to call for such a situation now, but those are the future benefits of a well-diversified portfolio with commodities.


Let us start with the most mined metal in the world, iron. Iron prices have been declining since 2011 after hitting a 30-year high of nearly $200 per ton. Prices then bottomed out in December 2015 at $40 per ton, only to jump to $60 per ton in April 2016 and then slowly decline to the current price of $50 per ton. From an historical perspective, prices are still high, but it is important to analyze the current supply and demand situation in order to see if iron is a good diversification metal, especially as central banks target inflation.

figure 1 iron ore prices
Figure 2: Historical iron ore prices. Source: index mundi.


All the biggest iron ore producers recently came out with their Q2 2016 production reports, giving a clear indication of the trend in commodities. The results are mixed, Rio Tinto (NYSE: RIO) increased iron ore production by 10% year over year while BHP Billiton (NYSE: BHP) decreased production by 2% and Brazilian Vale (NYSE: VALE) decreased production by 1%. As all major producers are developing new mining projects—like Vale’s 90 million tons per year S11D—and are able to increase production if necessary, we cannot expect the formation of a supply gap in iron and a surge in prices similar to what we witnessed in 2011. Further, as major producers keep increasing production it will keep a lid on future prices.

In order to be diversified with iron, the best thing is to look at the lowest cost producers who are profitable at much lower prices.

figure 2 iron ore cost curve
Figure 3: Iron ore cost curve. Source: Metalytics.


The lowest cost producers manage to have positive cash flows even with iron ore prices below $40, which is still a possibility if we see more global turmoil or slowing in China. On the other hand, iron should be a relatively good hedge against inflation.


Copper has reached its seven year low in January 2016 with prices below $2 per pound, but the recovery has been much smaller than with iron. Current prices are at $2.20 and copper has been trading in the $2.05 to $2.25 range since March.

figure 4 copper prices
Figure 4: 10 year copper prices. Source: Nasdaq.


But copper is expected to enter a supply gap in the next few years as global copper grades are getting lower, big mines are being closed and demand is constantly growing.

figure 5 copper deficit
Figure 5: Expected copper supply gap. Source: Visual Capitalist.


A sign of how important copper is comes from the fact that both Rio Tinto and BHP Billiton base their strategic exploration on copper. In 2015, Rio Tinto spent 66% of its exploration budged on copper with 25 of 37 exploration targets being copper focused.

figure 6 rio tinto exploration
Figure 6: Rio Tinto’s exploration. Source: Rio Tinto.


A commodity that is already in a supply gap and is a great example of what can happen to copper, is zinc.


Similarly to the above described commodities, zinc has reached its multi-year low in January 2016 with prices below $0.7 per pound. But, unlike copper, prices have quickly rebounded to the current $1.03 and the trend looks very positive.

figure 7 zinc prices
Figure 7: One year zinc prices. Source: Infomine.


The reasons for such strong performance are an increase in Chinese infrastructure spending, mine closures and a global increase in demand. With current zinc usage a few percentage points higher than production, we should expect even higher prices.

figure 8 zinc supply
Figure 8: Zinc supply and usage. Source: International Lead and Zinc Study Group.


Investing Opportunities

The lowest risk commodity investments are big miners with low debt levels and low costs.

Another option is to invest through ETFs that hold metal futures. Such an ETF equally spread in aluminum, copper and zinc is the DB Base Metals Powershares. Higher returns can be achieved by investing directly into specialized miners with low debt and low costs, giving a greater assurance of a profitable investment, however the risks also increase. 


Knowing how metal markets work, that near term supply gaps exist for several metals, and that prices are still close to multi-year lows minimizes risk and makes metals an attractive investment opportunity. But the main point of this article is that commodity metals are a protection against inflation since the metal supply is not flexible in the short term and fewer and fewer profitable mining operations are being discovered. With global central banks keeping interest rates very low, and increasing money supply, sooner or later inflation will kick in. Until that happens and metal prices rise, you can enjoy the high dividends miners are currently paying and have a well-diversified portfolio.



Get Ready For A Zinc Deficit

  • Zinc prices are already up by 50% this year and more growth is expected.
  • Mine closures and limited mine openings create a supply gap.
  • The World Bank estimates tight zinc markets for the foreseeable future.


Zinc is the fourth most used metal in the world. It is mostly used for steel galvanization – the process of corrosion-resistant zinc plating. Other uses include alloys such as brass, and dietary supplements.

The metal is typically mined in combination with copper, and similarly to copper, the main investing thesis behind zinc is that it is entering a supply deficit phase due to mine closures and increased demand.

This article is going to provide an overview of and outlook for the zinc market, an elaboration of the investment thesis and analysis of investment opportunities.

Zinc Market Overview

Due to global urbanization and development, zinc production has increased by 55% since 2000 and demand for the metal is expected to continue growing by a rate of 4% per annum. This constant demand growth is creating a zinc market deficit due to the fact that current zinc production cannot keep up with demand.

According to the International Lead and Zinc study group (ILZSG), mine production in 2016 is going to fall by 1.4%, total metal production that includes recycling will increase by 0.5%, while demand is expected to increase by 3.5%.

1 zinc 2016 estimate
Figure 1: Zinc is in a strong supply deficit. Source: ILZSG.

Supply was already lowered in 2015 as MMG removed about 350,000 tons of zinc from the market by closing its Century mine that was Australia’s largest open-cut zinc mine, and Vedanta Resources removed an average of 300,000 tons of zinc concentrate annually by closing its Lisheen mine in Ireland. Glencore has also cut back its zinc production by one third—or 500,000 tons—due to its high production costs.

As total mine production is forecasted to be 13,271 thousand tons of zinc in 2016, the closure of the two mines and Glencore’s cutback only removed about 8.5% of the global zinc supply. As there were no major zinc mine openings and there aren’t any in sight as it takes an average 15 years to develop a zinc mine, this resulted in a huge spike in zinc prices since the beginning of the year and lower London Metal Exchange (LME) zinc inventories.

2 figure zinc prices and LME stocks
Figure 2: Zinc prices and LME inventories. Source: World Bank.

As zinc moved into a supply deficit, LME inventories started to decline, and as supply got tight, prices shot up.

3 figure 12 months zinc price
Figure 3: Zinc prices in the last 12 months. Source: Witco.

The above represents an increase of 40% since December 2015 lows, but the outlook and average historical prices (figure 2) show that there is still plenty of room to grow.

The outlook for zinc is very positive from both independent and zinc dependent sources. ILZSG expects a further deepening of the zinc supply gap in 2016, and Teck Resources expects a continuation of the zinc supply deficit for at least 5 years.

4 figure up to 2020
Figure 4: Expected zinc supply deficit up to 2020. Source: Teck.

This is in accordance with the Word Bank and the International Monetary Fund expectations related to zinc prices.

5 figure expected prices
Figure 5: Expected zinc prices per ton. Source: World Bank.

The World Bank’s expected steady increase in zinc prices shows that there is a structural trend developing in the zinc market. But this doesn’t mean that the price will develop exactly like above. Short term periods of market tightening can result in large price increases, while risks like slower economic growth in China can negatively affect the price.

6 figure china zinc
Figure 6: China is the biggest consumer of zinc. Source: ILZSG.

Investment Opportunities

As the situation in global zinc markets is pretty straight forward and positive, an issue with zinc arises from the fact that it is difficult to find pure zinc investments as zinc is often a by-product in mining and mining corporations usually have other main resources. But a good alternative is the PowerShares DB Base Metals Fund that has a 33% exposure to zinc, with the remaining two thirds exposed to copper and aluminum. The copper exposure is also good as copper is expected to enter into a supply deficit by 2018.

For direct zinc stock exposure the important thing is to calculate the revenue percentage deriving from zinc in a company, assess the future outlook for other metals, and to see if production costs are below the cost curve.

7 cost curve
Figure 7: Zinc cost curve. Source: Teck Resources.

Low production costs enable a company to weather price declines and add extra profits when the cycle turns.


The conclusion is simple: zinc is going into a huge supply gap if global economic conditions stay stable. Most risks are related to the continuation of growth in China but this can be offset by India as it is entering a phase of high urbanization and infrastructure investments.

In relation to zinc investments, pure zinc miners can be found on the Canadian stock exchanges but as those are mostly young miners, their risks are not only related to zinc prices but also to the quality of their development projects and execution capacities. With more established miners the issue lies in their portfolio diversification. The best opportunities are to invest in ETFs with exposure to zinc.