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In sync for zinc

Analysts: Most metals could see higher prices if factors align

While many analysts are betting that most metals prices will at least hold their own, those who follow zinc say 2015 could be a breakout year for the gray metal.

China is expected to see lower growth of zinc output due to tightening ore supply worldwide and acceleration of inefficient capacity elimination in China, according to industry watchers.

Zinc demand in China, reflected by high output of galvanized plate/sheet, is strong. Production of galvanized plate/sheet hit a new record high of 4.82 million metric tons in December, thanks to growing consumption in the automobile sector and robust exports. Moreover, exchange inventories have been falling, which also should give a boost to zinc prices.

Analysts note that the market is already in deficit, and that deficit should get bigger following closures of at least two mines this year.

"We believe the lack of funding in zinc mine development and exploration has now caught up with the marketplace, and zinc prices will respond in 2015," observed analyst Mike Bandrowski of Clarus Securities Inc., who also noted that the market is already in deficit, and that deficit should get bigger following closures of two large mines this year.

Analyst Stefan Ioannou of Haywood Securities Inc. agreed.

While copper is off to a rough start in 2015 and other base metals also have shown price weakness, zinc could finish 2015 strong, he told "The Mining Report," recently.

Iaonnou predicted that zinc prices will average US$1.10 per pound in 2015, which is a notable move up from the current price, which is hovering just below US$1/lb.

"Then in 2016 and 2017, we could see zinc prices really run, as in 2007, when zinc rose to $2/lb. Any company with zinc in its name or zinc in its business plan stands to do well. Looking further ahead, we anticipate higher pricing will prompt more production, in turn moderating the market. Hence, we continue to use a long-term zinc price of $1.15/lb.," he said.

For copper, Iaonnou envisions prices averaging $2.50/lb. in 2015, which is in line with current spot pricing. But he added that "there is room for the copper price to go lower."

Copper steadied in mid-February as some investors bet that a floor had been reached after heavy losses. Prices for the red metal stabilized after hitting a five-and-a-half-year low in January.

"Copper is trying to look for a bottom, but there are plenty of things that can go wrong, revolving around Ukraine and Greece, in particular, and in the background the concern about the extent of the slowdown going on in China," Stephen Briggs, metals strategist at BNP Paribas in London, told reporters recently.

Analyst says copper's climb off its lows was not driven by improving fundamentals, but by oil's partial rebound from steep losses and expectations of more Chinese stimulus.

Gains were capped as physical demand in top metals consumer China was still soft and sentiment bearish ahead of the Chinese New Year. China is the world's top producer and consumer of refined copper.

Divided outlook for gold

What lies ahead for the price of gold depends on who you ask.

Industry analysts remain split over what 2015 will hold for the precious metal and where its price will end up by year's end.

Gold prices topped US$1,300 per troy ounce in early 2015 for the first time since the third quarter last year, as the euro tumbled to an 11-year low after the European Central Bank's new stimulus plans were revealed.

Jeffrey Nichols, senior economic advisor to Rosland Capital, said 2015 promises to be a good year for gold investors despite an "uncertain" near-term price outlook.

Nichols noted several drivers: U.S. economic performance and monetary policy, stock and bond markets, the insatiable appetite for gold in China, India, and other East Asian markets, and a growing number of central banks buying gold.

Some analysts even predict gold prices roaring to US$3,648/oz by 2018 and to US$7,829/oz by 2023, driven by money supply and the monetary base.

BMO Chief Economist Doug Porter, on the other hand, warned that interest rates could move higher sooner rather than later in 2015. Thus, his assumption for the next year is $1,190/oz, roughly the same as current prices.

Erica Rannestad, senior analyst, precious metals demand, Thomson Reuters GFMS, said gold prices will likely be lower in the first half of the year because of the Federal Reserve's expected move to raise interest rates in June. She called the Fed's actions "the top driver" for gold-price direction, and predicted that gold prices will likely consolidate in 2015 to average US$1,175/oz, with prices trending higher in the second half of the year.

Will silver follow gold?

Julian Jessop, head of commodities research at Capital Economics, said he expects to see the price of gold rise to US$1,400 by the end of 2015 and US$1,470 in 2016, but expects the price of fellow precious metal silver to outperform gold.

Silver is currently trading near all-time lows and has toyed with a rebound for months. While silver prices typically follow in gold's footsteps, silver has fared worse than gold recently. Gold is down 37 percent since it peaked at $1,900 per ounce in 2011. Silver has shed 67 percent since topping US$49 per ounce that same year. It was down 12 percent in 2014 alone, compared to gold's 1 percent drop.

A dearth of new supply through 2019, increasing use in industrial activity and narrowing of the silver-to-gold ratio should drive silver's price. After more than three years of a brutal correction and subsequent consolidation, however, some money managers believe silver is set to rise in 2015. They expect the silver spot price to increase by more than 30 percent to US$22 per ounce in late 2015.

Analysts forecast a modest increase to US$16.76/oz, with prices expected to trade in a range of US$13.91 to US$19.36.

Negative price factors include expected strengthening of the dollar, disinflation and slow growth from China and the Eurozone affecting industrial demand for the metal. But positive factors could lend support to prices, including expected additional global investment in solar power, continued support of silver exchange traded funds (ETFs) and expectations that retail investors may take advantage of attractive prices.

Because the market for silver is smaller and because the metal is mined along with other metals, the commodity's price has to move by large amounts before supply is changed, Jessop explained. This makes the price of silver traditionally more volatile than that of gold.

"As a result, silver has tended to out-perform gold when the prices of both are rising, but to under-perform when both are falling," Jessop added.

Changing REEs

Sluggish demand downstream is blamed for a recent drag on rare earth prices.

Following a World Trade Organization ruling, China in January said it is abolishing its decade-old export quota system for rare earths.

China produces nearly 90 percent of the world's REEs and consumes 70 percent of global production, making it the top consumer of the 17 elements used in a variety of hi-tech industries, including renewable energy, medical devices and defense applications.

But even before the lifting of quotas, the country's rare earth exports started to expand rapidly. Customs data show export volumes grew 27.3 percent in 2014 to 28,000 metric tons due mainly to improving U. S. manufacturing demand, according to a China News Service report.

The average export price of rare earth products, meanwhile, plummeted nearly 48 percent to only 83,000 yuan ($13,000) per metric ton, marking a third consecutive year of sharp declines.

Japan was the No. 1 buyer receiving nearly 43 percent of outbound shipments, while the United States ranked second.

Only two mines produce rare earths outside China, Molycorp's Mountain Pass mine in California and Lynas' Mount Weld mine in Australia.

Buyers of rare earth minerals are still refusing to pay a premium for secure rare earth supplies. Buying from the Chinese is still cheaper. As a result, say analysts, MolyCorp and Lynas are struggling.

The best bet for investors looking to profit from rising rare earth demand, said one analyst, is junior rare earth mining companies such as Ucore Rare Metals, which is focused on developing the Bokan-Dotson Ridge property in Southeast Alaska. Ucore's project has an estimated timeline to production of three years, about 40 percent of its resource, by weight, in heavy rare earth elements, and the U.S. Department of Defense, under the Defense Logistics Agency, working with the company on the development of its Bokan project.


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