Since Monday, June 29, 2015, a new physically-delivered zinc futures contract (ZNC) of 25 tonnes (metric tons) has been trading on the CME Globex. Its introduction has made it easier for both producers and industrial users to hedge price risk. However, like futures in general, the ZNC is serving another purpose that’s just as important: signaling market sentiment on zinc spot prices. In what is referred to as price discovery, futures prices are used for pricing cash market transactions. They’re everyone’s consensus on where prices on the underlying asset are going, and the consensus is that zinc is on its way up.
At the start of trading, at the time of writing, on Monday, January 25, 2016, the January contract was quoted at $1,511.50. (The ZNC contract expires on the third last business day of the contract month, which, for January, should be Friday, January 29, 2016, since the CME Globex trades on Sundays.) This climbs to $1,522.00 for March delivery; to $1,533.00 for June delivery; to $1,540.50 for September delivery and to $1,548.50 for delivery in December 2016.
What’s driving this optimism? There are a number of factors that might be responsible. One is the news coming out of China. The authorities in China published data recently reporting GDP growth of 6.9 percent in 2015. The response has generally been one of concern, but the growth in China’s economy needs to be put into perspective. World Bank data reports China’s 2014 GDP at $10.4 trillion. A 6.9 percent increase on that, for 2015, amounts to about $714 billion, larger than the size of the economy of Switzerland. In fact, the increase in China’s GDP in 2015 surpassed the size of most of the world’s economies, some 174 of the 193 countries for which the Bank collects data. A 6.9 percent increase is no cause for lament. It’s more than the 10.6 percent growth that was lauded just five years ago when the Chinese economy grew from $5.1 trillion to $6.0 trillion. China’s appetite for natural resources still remains voracious. According to mining giant MMG, citing data sourced from industry analysts Wood Mackenzie, China consumes 47 percent of global refined zinc.
In the longer term, according to data sourced from iHS and Wood Mackenzie in the MMG Market Outlook, the global automobile industry will be one of the main drivers of zinc use over the next 6 years, when some 20 million cars will be produced worldwide. Greater China will account for a little less than half, totaling about 9.5 million, South Asia will add another 5.4 million, Europe 2.8 million, North America 1.9 million, South America 1.4 million, and the Middle East 0.5 million. A decline of 1.5 million is forecast for Japan and South Korea.
On the supply side, mine closures are expected to reduce estimated mine production by about 8.5 percent. MMG has ceased operations at Century in Australia, which at its peak was yielding about 500,000 tonnes per annum. Another 500,000 tonnes is expected to be withdrawn from global supply if Glencore makes good on its threat to cut production at its facilities in Australia, Peru and Kazakhstan. Today, the newspaper Irish Independent reported (http://dtn.fm/D4OCi) that, last week, Vedanta Resources made its final shipment of zinc concentrate from Tipperary’s Lisheen Mine. Mining activity at the Lisheen Mine was concluded in November 2015, whilst milling ceased in December. The report went on to add that the Lisheen facility ‘typically produced 300,000 tonnes of zinc concentrate’ per annum.
Star Mountain (OTC: SMRS) is poised to exploit these changing market dynamics. In October 2015, the company acquired the Balmat zinc mine in New York state. The Balmat mining complex includes a permitted and equipped mine, a 5,000 ton per day floatation mill, an office complex and ancillary infrastructure to enable the operation of the mine. The acquisition of Balmat includes 2,699-acres of fee simple real estate and over 50,000 acres of mineral rights within St. Lawrence and neighboring Franklin counties in New York. It seems Star Mountain is following Abe Lincoln’s old adage: the best way to predict the future is to create it.
For more information, visit www.starmountainresources.com
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