Japan's top producer says zinc could surge to 5-year high

[TOKYO] Zinc, this year's best performing metal, has the potential to extend gains to the highest level since 2011 because of a shortfall in ore production, assuming that Glencore doesn't restart idled mines, according to Japan's biggest producer.

Prices could advance to US$2,500 a metric ton by March because of "super tight" ore supply after companies cut output, Osamu Saito, general manager of Mitsui Mining & Smelting's metals sales group, said in an interview in Tokyo.

"Even if Glencore ends production cuts, supply will continue to trail demand, though the feeling of shortage will ease somewhat."

The company joins Goldman Sachs Group Inc, Deutsche Bank AG and Citigroup Inc in highlighting the bullish outlook.

Goldman Sachs predicts that zinc will reach US$2,500 in three months, while Citigroup says it will average US$2,445 in 2017. The metal used to galvanise steel has already risen more than its peers on the London Metal Exchange this year and traded at US$2,259 on Monday at 10.12am in Tokyo.

Mitsui Mining is maintaining its estimate for a global deficit this year of 440,000 tons, the widest in over a decade.

About 1 million tons will be lost this year through Glencore's cuts and closures of depleted mines in Australia and Ireland, Mr Saito said on Thursday.

That's about 7 per cent of global supply last year based on International Lead & Zinc Study Group data compiled by Bloomberg.

Ore output in China, the world's biggest producer and consumer of refined zinc, will also be curbed this quarter because of the approach of winter, prompting local smelters to reduce production, Mr Saito said.

"Our analysis suggests that the zinc market still has the best fundamentals, and it remains our top pick," RBC Capital Markets said in an Oct 16 note.

The firm lifted its 2016 forecast for zinc to US$0.93 a pound from US$0.85 and raised its 2017 forecast to US$1.15 a pound from US$1.10. That's about US$2,535 a ton.

Glencore closely monitored supply and demand before cutting 500,000 tons of output last year, Chief Executive Officer Ivan Glasenberg told investors on an August call.

"At the right time, where we believe supply-demand justifies bringing it back into the market, we'll do the same day," he said. A spokesman for Baar, Switzerland-based Glencore declined to comment further.

"Everyone is focusing on the issue of whether the company keeps the output cuts," Mr Saito said. A majority view among industry analysts is that the company won't act until after the first quarter of 2017, he said.

Average prices could drop to US$2,100 in the financial year starting next April if Glencore restarts the idled mines, while they could increase to US$2,400 without a resumption, Mr Saito said. He put the average for the next six months at US$2,300. "There's nothing out there that we can see capable of driving prices below US$2,000," Mr Saito said.

BLOOMBERG