Zinc the metal for 2006

jschlieff · 27 December 2006

I don't think it has been mentioned previosly, but an important factor for analysing the strength of zinc stocks for the coming year is the direction of TC and price participation ie the main revenue source for zinc smelters.

A little about me first. I am spending a fair amount of time analysing the direction of TC, PP and the payables portion or 'free metal' component.

We gather that the amount payable to zinc smelters to refine zinc concentrate can be understood below. This equation signifies the amount of revenue which zinc smelters receive based on the current spot price of zinc. Every year, a base level for pp is negotiated and currently this stands at USD1400, however my research is suggesting that this will rise above USD2800 given the short-term direction of the zinc price. I am also forecasting that the base tc will increase given the decreased floating portion provided to smelters as a revenue source.

Realized TC = Base TC + (Spot Zinc Price – USD1400) x 14%

Another important factor to consider is the free metal component where presently, zinc smelters only pay for 85% of the zinc contained within the concentrate delivered by miners due to contract negotiations which take into account production losses etc. However miners are well aware that smelters are able to retrieve up to 97% of the zinc, hence they are essentially receiving free zinc.

I am forecasting that this payables portion will also increase substantially to around 93% given enhanced metallurgical extraction technology.

Given my forecasts and the research I am expecting that 2007 will be quite a bad year for zinc smelters compared to 2006 given these factors, even though the zinc price is expected to continue to rise in the short-term and then soften as supply increases.

2007 on the otherhand, will be quite a lucrative year for miners, but only i the short-term as major zinc mine expansion projects being to take effect throughout 2007 such as:

- San Cristobal
- Dairi
- Golden Grove

I am expecting 2007 to be quite a good year for zinc stocks, however keep in mind this is just my opinion and is not substantiated by a CFA or AICPA qualifications. 2006 has been an exceptional year for zinc smelters such as Korea Zinc, but I am forecasting that next year we will not see the same results.

Just my first contribution to this forum, I hope it has provided some food for thought in the upcoming trading year.

Regards,

James Schlieff

barney · 27 December 2006

Another important factor to consider is the free metal component where presently, zinc smelters only pay for 85% of the zinc contained within the concentrate delivered by miners due to contract negotiations which take into account production losses etc. However miners are well aware that smelters are able to retrieve up to 97% of the zinc, hence they are essentially receiving free zinc.
I am forecasting that this payables portion will also increase substantially to around 93% given enhanced metallurgical extraction technology.

Given my forecasts and the research I am expecting that 2007 will be quite a bad year for zinc smelters compared to 2006 given these factors, even though the zinc price is expected to continue to rise in the short-term and then soften as supply increases.

Howdy JS, Interesting observations ............ Could this be the reason that Zinnifex decided to "off load" its smelter operations into a separate JV arrangement?? .... That would make good business sense I guess ... Cheers, Barney

michael_selway · 1 January 2007

http://www.globeinvestor.com/servlet/story/GAM.20061230.RYEARCOMM/GIStory/

Agriculture could be set to make hay
JOHN PARTRIDGE

Saturday, December 30, 2006

You'd have to twist commodities high priest Jim Rogers' arm pretty hard to persuade him to bet heavily on precious metals in 2007, even though he doesn't particularly dislike their prospects.

"If I had to buy a metal, I'd buy silver, palladium, gold, I guess in that order," the creator of the Rogers international commodities index -- and its constituent energy, metals and agricultural indexes -- said recently when reached in New York. "But I don't have to buy any of them, so I'm not."

Instead, Mr. Rogers, who first gained fame as a partner of investing legend George Soros, is continuing to thump the tub for agriculture, which has accounted for about 35 per cent of the index since he launched it in 1998. "I expect that to be the place to be," he said.

He is not alone.

Commodities analyst John Normand at J.P. Morgan Securities Ltd., recently pegged agriculture as his top sectoral bet for 2007, followed by the precious metals Mr. Rogers plans to eschew. Energy and base metals will, by contrast, be the lowest-performing sectors, Mr. Normand said in a report.

"Low inventory levels and ongoing focus on [crop-derived] alternative fuels favour higher prices in 2007, even after this year's gains," he said of agriculture, noting that the sector has been "the laggard" through the current commodity price cycle. "Corn has the most upside . . . followed by wheat and soybeans."

After rocketing skywards for pretty much four years straight, commodity prices took a hit in the general global market correction that began in mid May of this year.

The Rogers index, for instance, climbed from a November, 2001, low of 1,245 points to a peak of 3,831 last May 11, then dropped as far as 3,198 at the beginning of October. It is currently in the 3,400 to 3,500 range.

Bank of Nova Scotia's commodity price index has traced a similar pattern, and currently sits 4.3 per cent higher than a year ago.

"In November, the index rallied quite sharply after a couple of months of weakness, and it's only 1 per cent below the . . . all-time peak," said Patricia Mohr, a vice-president who heads commodity research at the bank.

She also figures that, barring any major shocks, "we might retest the high at some point early next year."

But not led by the same commodities. Metals and minerals have supplanted oil and gas as the index's leaders, with gains of more than 50-per-cent as of last month.

By contrast, natural gas has gone from hero to zero.

In 2005, it led all commodities futures, with a 111-per-cent price gain -- as measured on the Goldman Sachs Commodity Index -- with much of the surge coming in the wake of the destruction of hurricane Katrina. But this year, in the absence of a ruinous storm season, its futures have been the worst performers, dropping 73 per cent.

Meanwhile, crude oil, which climbed from the low $40s (U.S.) a barrel to nearly $70 in 2005, cracked $77 in July of this year. But it then fell to less than $56 last month and is currently fetching a little over $63.

Strategists at Merrill Lynch & Co. recently lowered their 2007 price forecast for West Texas Intermediate to $60 a barrel from $65, citing decelerating global demand, high inventories and the rapid expansion of biofuel production.

They have, however, raised their 2008 forecast to $62 a barrel from $50, saying they expect global demand to strengthen and non-OPEC production growth to slow.

Bank of Montreal commodities specialist Bart Melek figures that OPEC members are likely to exhibit more discipline than they have in the past in an effort to keep prices up. "I think we have a new paradigm within OPEC: they want to keep prices at $60," he said. "They've gotten used to the revenues, and they've found out it doesn't kill their economy."

Ms. Mohr is betting that uranium will outperform all other commodities in 2007. The nuclear fuel, which just six years ago was fetching only $7.10 a pound, recently hit a startling $72, up nearly 10 per cent in a single week, as hedge funds and other financial players continue to make their presence felt.

Ms. Mohr now figures the fissile metal will average about $80 a pound in 2007 and finish the year close to $90. The rest of her top picks for next year are, in descending order, zinc, silver, canola, barley and gold.

Toronto-Dominion Bank economist Derek Burleton is less sanguine about the price outlook for commodities, at least in the first half of 2007.

He is forecasting that the TD commodity index will lose between 5 per cent and 7 per cent in the first six months of the year.

Mr. Burleton is expecting a drop of 25-per-cent to 30-per-cent in the prices of most base metals in the first half, after watching many of them follow "virtually a straight line up" in 2006.

"I definitely am of the view that the fundamentals for most base metals markets remain very strong, but I just believe that the current level of prices won't be sustained in 2007 and that we will get a pull-back," he said.

Zinc will be in the best position to weather the storm, he added, while nickel and copper likely will experience "sharper declines."

However, Mr. Burleton expects base metals prices to recover enough in the second half to leave the TD commodity index a little higher than it is right now. In TD's view, the U.S. economy is unlikely to suffer more than a temporary slowdown, and it also sees continued robust demand coming especially from China and India.

Mr. Burleton also figures there may be some good news in store for Canada's beleaguered forest products industry.

It has been hammered hard by the popping of the U.S. housing bubble, with lumber falling to as low as $229 per thousand board feet in late October, which he described as "depression levels."

However, history shows that lumber prices generally do not stay below $300 per thousand board feet -- roughly break-even for the industry at large -- for very long, he said.

"We've got [the price] heading back above $300 by the second quarter and staying there for the rest of the year," he said.

Best and worst performing futures in 2006

Ranked returns, year-to-date

Nickel +200.1%
Zinc +152.3
Lead +60.8
Corn +54.2
Copper +52.3
Silver +42.7
Wheat +24.8
Kansas wheat +20.0
Gold +19.9
Aluminum +18.7
Cocoa -5.9
Gas oil -10.8
Brent crude -12.0
Feed cattle -12.7
Cotton -15.1
Crude oil -23.5
Gasoline -23.8
Sugar -34.5
Heating oil -36.5
Natural Gas -79.0

SOURCE: BLOOMBERG FINANCIAL SERVICES

© The Globe and Mail

wavepicker · 6 January 2007

chops_a_must said:
Where to from here? ZFX bounced from below 18 again.

You were saying chops.............. A few minor subdivisions were finished to the upside before the this baby made it's move, but overall was only out by 2 days. It's funny- I find that when people get the knives out and start attacking me, that's when I feel I have made the right decision.

As expected, zinc along with the other metals is in the process of getting hammered.

MS:- Never doubt a good chart pattern. Much can be gleaned from charts
Rederob:- Fundementals LAG the market.

Trade what you see not what you hope or expect to happen.
To those that went short, they did their hard work and planning. Now they can sit back and let the market do the work for them.

Zinc going back to 3000-3500 a tonne within 12 months. To those that decide to hang and hope, they will be waiting for a while IMO

Cheers

rederob · 6 January 2007

wavepicker said:
Rederob:- Fundementals LAG the market.

Time sorts out many things.
In the medium term (I use around a 6 month time frame when stating that sense) the case for zinc will be significantly stronger than it is today and was last year.
Fundamentals actually drive the market, and technicals provide the history.
If that were not so, technicians would have foreseen CDU having a stellar 2006.
As has happened many times before for base metals, the bears see a retrace gather momentum and think the jig is up for metals.
Whereas during the week the only metal that "drifted" fundamentally was copper, and that will rebound slightly next week.
All that has happened in recent days is a huge amount of money being taken off the table by funds who are convinced their money will be better placed elsewhere.
And their actions have collapsed base and metal prices substantially.
Technically, zinc is going through the same period of consolidation it went through from May 2006.
Fundamentally, zinc prices stalled when substantial destocking of Chinese inventories occurred as the metal went from contango to strong backwardation. Unless China can show in the next month or so that it has significant metal oversupply to deliver to LME (Singapore warehouse) the trend from 2006 will be repeated this year.
At global levels the supply/demand fundamentals for zinc will only materially change to the downside in 2007 if there is an early failure of western economies.

wavepicker · 6 January 2007

rederob said:
Time sorts out many things.
As has happened many times before for base metals, the bears see a retrace gather momentum and think the jig is up for metals.

Hi rederob, IMO zinc will go through a retracement OK. It's largest retracement since 2003. This may take upward to 1 yr IMO. After that I will put the bull horns on with you.

rederob said:
Technically, zinc is going through the same period of consolidation it went through from May 2006.

Possibly, but I think this time it will take much longer, if you have the nerve to hold. Most people don't, and that's why this will be a major correction I think. Before the bullmarket can resume, most market players must be utterly convinced that there is no future of prices recovering. Basically this correction has to wash out all the bulls first!!

Cheers

champ2003 · 6 January 2007

Fat profits has an overwhelmingly bullish view on Zinc for 2007 and believe's that the price of Zinc will hit new heights in 2007.

wavepicker · 6 January 2007

champ2003 said:
Fat profits has an overwhelmingly bullish view on Zinc for 2007 and believe's that the price of Zinc will hit new heights in 2007.

Hey, anything is possible in the market. Personally I am a short term player and trade move by move, both up and down where an identifiable pattern has a high probability. sometimes it don't work. Every moment and move in the market however is unique.

If Fat Prophets is bullish, then good luck to them. I suppose they have done rather well over the last 3 years like many other buy and holders. However past performance is no indication of future perfomance.

I think you have to do your own research though.
Good Luck

Cheers

michael_selway · 6 January 2007

wavepicker said:
Trade what you see not what you hope or expect to happen.
To those that went short, they did their hard work and planning. Now they can sit back and let the market do the work for them.

Wavepicker, both Traders and Fundies buy and sell on what they think will happen next with the share price, its all future stuff right?

rederob said:
Fundamentals actually drive the market, and technicals provide the history.

Red I agree, you have to look at the future demand/supply of the zinc market and yes it will be tight, meaning a bullish zinc price generally.

Wavepicker, you mention the below, but thats a contradiction of what you do. You look at charts to base you next decision. Charts are past performance right?

wavepicker said:
However past performance is no indication of future perfomance.

thx

MS

toothfairy · 6 January 2007

champ2003 said:
Fat profits has an overwhelmingly bullish view on Zinc for 2007 and believe's that the price of Zinc will hit new heights in 2007.

Fat Prophets has also been telling people to buy WES for a couple of years now, use your own judgement. I think they got fat by making profits from others.

Cheers.

chops_a_must · 6 January 2007

wavepicker said:
You were saying chops.............. A few minor subdivisions were finished to the upside before the this baby made it's move, but overall was only out by 2 days. It's funny- I find that when people get the knives out and start attacking me, that's when I feel I have made the right decision.

As expected, zinc along with the other metals is in the process of getting hammered.

I don't remember attacking you. I was just healthily sceptical, like I am of everything. If you want to know what decision I made, you can have a look at the ZFX thread. I made it based on the change of sentiment. I'm not about to let pride lead to stupidity.

BREND · 7 January 2007

michael_selway said:
Wavepicker, both Traders and Fundies buy and sell on what they think will happen next with the share price, its all future stuff right?

Red I agree, you have to look at the future demand/supply of the zinc market and yes it will be tight, meaning a bullish zinc price generally.

Wavepicker, you mention the below, but thats a contradiction of what you do. You look at charts to base you next decision. Charts are past performance right?

thx

MS

Zinc demand in China has been weak actually, and many tons of zinc has been delivered into London Metal Exchange warehouses for the past few months (since July 06). Because pricing of zinc in China is lower compared to LME.

On the surface, Zinc looks like a good metal to buy, due to its falling inventory level. But inventory level has been rising for the past weeks. Is this a sign that zinc price has peaked?

wavepicker · 7 January 2007

michael_selway said:
Wavepicker, you mention the below, but thats a contradiction of what you do. You look at charts to base you next decision. Charts are past performance right?

Hi MS, was referring to the past performance of Fat Prophets, not the market.

cheers

Magdoran · 8 January 2007

So I take it that all the "perma" bulls are buying Zinc stocks like mad right now, correct?

Mag

BREND · 8 January 2007

Magdoran said:
So I take it that all the "perma" bulls are buying Zinc stocks like mad right now, correct?

Mag

I believe zinc is still a good investment if you are looking at more than 1 year investment period. Zinc demand may be slowing, but zinc inventory had also fallen so much for the past 1-2 years. So zinc market could still be tight in future.

I notice that most zinc companies also supply lead, ie Teck Cominco and Zinifex. Lead is few of the metal whose demand is growing in China now. So those companies will benefit as well.

I'm targeting Zinifex myself, still waiting for the price to drop more.

chops_a_must · 8 January 2007

wavepicker said:
I think there is a fair chance we will see 3000 in Zinc before 5000
Cheers

And quicker than you think by the looks! Lol!

BREND · 8 January 2007

chops_a_must said:
And quicker than you think by the looks! Lol!

Zinc price is now 3730/ 3750.

wavepicker · 8 January 2007

chops_a_must said:
And quicker than you think by the looks! Lol!

Always the way isn't it chops. Sorry, sounded conservative as didn't want to scare the bulls too much. But their was a great short term trade in the offering if anyone wanted to make it

Cheers

YOUNG_TRADER · 9 January 2007

Zinc getting smashed!!!!!!!

Other Base metals aren't doing too bad, Copper is actually up!

Zinc January 08,08:00
Bid/Ask 1.7297 - 1.7388
Change -0.0964 -5.28%

chops_a_must · 9 January 2007

ZINC-INDICATION Quanto (E.. 3,810.01 -80.00 (-2.06 %)

Sedol: - Exch: Misc. Sym: Q_EUR_GS0000000097_U01 08/01 13:59

Zinc the metal for 2006

jschlieff

barney

michael_selway

Coal & Phosphate, thats it!

wavepicker

rederob

wavepicker

champ2003

wavepicker

michael_selway

Coal & Phosphate, thats it!

toothfairy

chops_a_must

Printing My Own Money

BREND

wavepicker

Magdoran

BREND

chops_a_must

Printing My Own Money

BREND

wavepicker

YOUNG_TRADER

chops_a_must

Printing My Own Money

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