How to Profit From the Zinc Bull Market
To the average person, zinc may sound boring, but it's hugely important.
It's also profitable.
Zinc is used in everything from steel to sunscreen, and its price just soared to a three-year high, thanks to a supply shortage.
The metal is up 13% this year, and that's just the beginning.
Many industry participants had anticipated the zinc shortage, but it's been much more severe than forecast.
Earlier this year, the International Lead and Zinc Study Group forecast a 117,000-ton zinc shortfall. But as of July (the latest data available), zinc supply trailed demand by 248,000 tons – more than double the expected gap.
The problem is that aging mines running out of the metal much faster than anticipated, and demand has unexpectedly spiked, due to gains in U.S. construction and worldwide auto sales. Zinc is also used in coins, like nickels and pennies. In fact, the recent price surge means it now costs 1.6 cents to manufacture a penny.
Demand for zinc was 7.6% higher during the first seven months of 2014 than it was during the same period last year.
And global stock piles are shrinking, as a result.
Zinc holdings at London Metals Exchange warehouses are down 22% since the start of the year. At 731,675 tons they're equivalent to about 20 days of production.
That's an issue, because new zinc mines take years to develop.
Morgan Stanley now predicts that zinc production will continue to fall short of global demand through 2018.
Investing in Zinc
Clearly, there's profit to be made, here.
Unfortunately, the unheralded zinc is difficult to invest in.
Still, there are ways to play it.
Obviously, there are futures, but that's risky business if you're not a seasoned trader.
Another way is through ETFs such as the iPath Dow Jones UBS Industrial Metals ETN (JJM), or the PowerShares DB Base Metals Fund (DBB).
Of the two, DBB is better because zinc makes up about one-third of its value, compared to just 15% for JJM. That's a big reason why DDB is up 11.5% since March, while JJM is up just 7.3%.
Of course, there are also zinc miners to consider.
Sesa Sterlite (NYSE: SSLT), for example. Sterlite is a diversified metals producer operating out of India. The company just announced that it would spend $630 million developing an open pit zinc mine in South Africa.
The first phase of the Gamsberg open pit mine is expected to have a total lifespan of around 13 years with the first ore likely to be produced in 2017/18.
The Vancouver-based Teck Resources (NYSE: TCK), meanwhile, owns a stake in the largest zinc mine in the United States – the Red Dog mine. Red God accounts for more than 70% of the country's zinc production. The company is also producing zinc out of a mine in Peru.
Finally, there's Australian mining giant BHP Billiton (NYSE: BHP). BHP is the largest mining company in the world, so it's not strictly a zinc play. The company produces everything from gold, to iron and copper.
However, it should be noted that miners across the board have been struggling with a stronger dollar, recently. That is, zinc finds itself in a uniqe position in terms of upside potential. So too much diversification in this case is actually a bad thing.
That's why if you're serious about investing in zinc futures and ETFs remain your best bet... for now.
@nickchodge on Twitter
Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.