Zinc breaks through US$3,000 barrier as metals rally gathers pace

[LONDON] Zinc surged above US$3,000 a metric ton amid persistent global deficits, and aluminium climbed as China reined in illegal capacity, adding fresh impetus to the rally even as some investors expressed concerns.

Zinc jumped as much as 2.6 per cent to US$3,037 a ton on the London Metal Exchange, the highest level since 2007, and traded at US$3,029 at 1:20 p.m. in London. Aluminium gained as much as 1.3 per cent to US$2,075.50 a ton, the highest since November 2014, while nickel, copper and lead all traded higher.

An index of base metals rallied to a two-year high last week amid better-than-expected demand in China and a weakening US dollar.

The Chinese government is stepping up moves to shut illegal aluminium and steel plants this year, both to cut excess capacity and help to protect the environment.  Efforts to promote economic growth in China ahead of a leadership reshuffle scheduled for later this year are also boosting metals usage in manufacturing and industrial sectors, according to Bernard Dahdah, a metals analyst at Natixis SA in London.

"Earlier this year, a lot of the rally was supply related, but recently we've seen demand starting to support as well," Mr Dahdah said by phone.

Zinc rallied 60 per cent last year as worldwide demand topped supply after producers including Glencore Plc suspended some output. In the first five months of 2017, there was a global deficit of 181,000 tons, according to the World Bureau of Metal Statistics.  The metal is also gaining from a favorable import arbitrage for Chinese buyers, and rising premiums in the physical market, analysts at Macquarie said in a note on Aug 15.

Lead has been boosted by China's move to ban imports of metal concentrates from North Korea, the analysts wrote.

Supply disruptions at major mines have also helped to lift copper to the highest in nearly three years, while aluminium is the best performer on the Bloomberg Commodity Index after the Chinese government ordered output curbs.

China Hongqiao Group Ltd, the nation's top aluminium smelter, confirmed on Tuesday it cut 2.68 million tons, or 29 per cent, of annual capacity. UBS Group AG raised its near-term aluminium forecast to 95 cents a pound, or US$2,094 a ton, for the fourth quarter of 2017 and first quarter of 2018, according to a note received Wednesday.

Tin is the only major base metal to fall this year on high levels of mine output in Myanmar that defied expectations of a slowdown. The metal content of tin concentrate shipments from Myanmar to China was up 43 per cent in June from a year earlier, according to estimates from industry group Itri Ltd. Tin fell 0.5 per cent on Wednesday.

Nickel gained 2.4 per cent and copper climbed 1.2 per cent, snapping five days of losses after Freeport McMoRan Inc warned employees that flooding near the Grasberg mine in Indonesia might crimp output at the world's second-largest mine.

The metals rally has some investors warning of a pullback.  Hedge fund manager Crispin Odey is shorting metal stocks in anticipation of slowing growth in China. "China's economy in a year's time will be much weaker than it is now," Mr Odey, whose London-based firm manages about US$6 billion, said in a phone interview.

BLOOMBERG