Tuesday, December 13, 2016

Zinc Rally Driven by Demand for Better Cars in China and India

In a stellar year for commodities, one base metal—zinc—has stood out from the pack, with prices rising more than 70%.
Thanks to greater demand for higher-quality cars in big developing markets like India and China, many investors believe this rally won’t be just a flash in the pan.
Zinc’s surge had already been aided by the closure of several mines world-wide during a previous price slump, which restricted supply of the base metal. Now, with consumers in India and China buying more cars that use rustproof galvanized steel—which is made using zinc—analysts believe demand could continue to outstrip supply. 
“The rise in zinc and coal has certainly brought back investor optimism,” said Steve Hulton, research director at Metals & Mining Fundamentals in Sydney. “Given zinc’s comparatively tighter fundamentals among base metals, we do expect zinc prices to continue to outperform.”
At the moment, the bodies of cars sold in India and China use galvanized steel sparingly. While its use adds less than 2% to the price of a car, according to Sunil Duggal, chief executive officer ofHindustan Zinc Ltd., auto makers have been reluctant to make it standard in developing markets due to a lack of consumer awareness about its benefits, in addition to cutthroat price competition. That could change as more affluent customers demand better-made rides.
It takes nearly 8 kilograms of zinc to protect a car from rust and another 9 kilograms for die-cast parts like locks and door handles. Multiply that by the millions of cars that aren’t being rustproofed and it adds up to a game-changing new source of demand for the commodity, said Edward Brogan, a private-equity investor and director of Star Mountain Resources, which has the Balmat zinc mining operation in St. Lawrence County, New York.
“Clearly, the adoption of zinc especially by Chinese auto makers would represent a significant incremental increase in global demand,” said Mr. Brogan, adding that the increase in infrastructure spending promised by U.S. President-elect Donald Trump could be another large source of fresh demand.
To be sure, there is no guarantee that rustproofing will take off in India and China. Some of the world’s biggest mining companies may be able to bring some of their zinc mines back online quickly, which could douse prices.
Amit Kumar, an electronics salesman in New Delhi, got a car four years ago as a wedding gift. Parts of it are already rusting through.
“I want to preserve this [car] because of the many wonderful memories, but those have all been marred by the rusting,” he said, pointing to the brown blotches along the bottom of his white Maruti Suzuki Alto. “I will make sure that my next car won’t have the same problem.” 
India’s leading car maker, Maruti Suzuki India Ltd., is starting its rustproofing race by making galvanized steel standard in the bodies of one of its best-selling models. China’s Dongfeng Motor Corp. and Changan Automobile Co. Ltd. have also been offering rustproof car bodies.   
“Using galvanized steel makes the car body stronger as well as lighter than other auto-grade steel, helping to increase the vehicle’s mileage and robustness,” a Maruti spokesman said.
China is the world’s largest car market and India is poised to become the fourth-biggest. It is therefore understandable that zinc producers are looking to these countries as huge untapped markets.
“We expect a demand explosion,” says Seshagiri Rao, chief executive of JSW Steel Ltd., a leading Indian producer of rustproof steel.
Zinc company shares have been rallying along with the commodity’s price this year. Norwegian mining company Boliden AB has jumped about 75% while India’s Hindustan Zinc is up more than 100%: Both are among the world’s top 10 producers of the metal.
Demand for zinc from the auto industries in India and China is likely to rise from about 150,000 tons a year at present to around 400,000 tons, the International Zinc Association said, without giving a specific timeline.
“This is significant demand on a global scale,” says Stephen Wilkinson, executive director of the association.

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