The Metal China REALLY Wants

Written by Gerardo Del Real
Posted August 8, 2017 at 4:47PM

The major U.S. indices continue to set record highs and will continue to while gold and silver keep trading in a sideways range.

gold standing still

Neither gold nor silver have broken out, or broken down, yet. Consider that in the past four months gold prices have moved in a 7.6% range, the least in 10 years while volatility is at its lowest since 2005.

But despite the summer doldrums and the lack of a definitive direction in the precious metals price, most companies in the Resource Stock Digest Premium portfolio have been busy. The ones that haven’t are on the clock.

Copper and zinc meanwhile have been steadily moving higher.

Copper rose to the highest in more than two years on expectations of strong economic growth in China and news of Chinese restrictions on scrap imports that would increase demand for imported refined copper.

This isn’t a surprise to those of you who have read my opinion on copper, and the summertime has provided great opportunities to add to positions on my favorite ways to play the copper space.

Plans for large-scale infrastructure spending have not yet materialized. If and when they do it will be a positive for the copper price, but let’s be clear that the main driver is China.

The International Monetary Fund increased its growth expectations for China in 2017 and 2018, while leaving its forecast for the global economy unchanged and trimming its forecast for the U.S.

The IMF also raised its growth estimates for Europe and Japan.

gold rally intact

The primary uses of zinc are galvanizing steel to protect against weather and corrosion, producing brass and bronze, and die-casting to produce a wide range of metal products. Zinc can also increase crop yields and crop quality and there’s the often-underreported demand surge that will come from electric vehicles and renewable energy.

Zinc was the best performing industrial metal in 2016 after registering a 60% increase. Gains this year have been solid at 9% thus far.

Miners in China have been struggling to make up for falling global output seen after the closure of large mines in Australia and Ireland and a move by Glencore to suspend a portion of its production in late 2015.

Notable recent closures include Lisheen in Ireland, Century in Australia — which between them accounted for around 5% of annual global supply — and Glencore Xstrata’s Perseverance and Brunswick mines.

China, the world’s largest producer, accounts for almost half of annual zinc demand, and between 35% and 40% of global supply, making it a net importer.

Bloomberg reported that the global refined zinc market was in deficit in May with consumption of 1.15 million tons exceeding production of 1.108 million tons, the International Lead and Zinc Study Group said on July 17.

The group expects demand to outpace supply by 226,000 tons this year.

Zinc is the fourth most-widely-used metal in the world, after iron, copper, and aluminum. Per year, it’s about a $38 billion market.

For context, zinc is approximately twice the size of the silver market and roughly one-fifth the size of copper.

There are multiple ways to gain exposure to the zinc space. There’s a zinc ETF as well as large miners such as Teck, BHP Billiton (BLT), and Kaz Minerals (KAZ).

But the real leverage is in the juniors and the truth is there just aren’t many juniors with quality zinc projects AND quality share structures.

Those that are able to check both boxes and continue to advance projects will do very well in the next several years.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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