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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