June 20 (Reuters) - Zinc is set to retain its premium over sister metal lead after recapturing that position this week, as investors price in the closure of big mines that will create deeper shortages of zinc than lead.
Three months zincon the London Metal Exchange traded $37 a tonne higher than lead on Friday, regaining its dominant position after several years of being at a discount as the market was burdened by surpluses.
The flip in the relationship of the metals has been swift - less than two months ago lead was $106 more expensive than zinc.
Zinc traded slightly higher than lead briefly during 2012, but it has not sustained a large premium since 2010, when it was $245 stronger at one point.
The two metals are usually found in the same mines and their spread and ratio are traditional trading strategies.
While both metals are due to record deficits this year, recent data from mining companies has shown that shortages in zinc are due to be more severe than in lead as big mines come to the end of their commercial lives.
"We think it's completely right that zinc should outperform lead," said Nic Brown, head of commodities research at Natixis.
"You have an abrupt halt in growth of zinc supply whereas lead has been substantially less affected than we had anticipated."
Zinc's deficit in the first four months of the year expanded to 107,000 tonnes while lead's shortfall was only 12,000 tonnes, the International Lead and Zinc Study Group said this week.
Brown has forecast a deficit this year in zinc of 476,000 tonnes, at the top end of analyst estimates, while he has pencilled in a lead deficit of only 45,000 tonnes.
The combined loss of zinc output at four major mines that are closing - including Century in Australia and Lisheen in Ireland - is over 1 million tonnes by next year, according to metals strategist Stephen Briggs at BNP Paribas.
These losses will only be partially offset by new mines starting up, he added.
RECYCLING BOOSTS LEAD SUPPLIES
Although lead is also produced at the same mines, that market may not be as seriously affected largely due to the big market in recycled metal, mostly from lead batteries.
"These mine closures hit zinc harder because lead is so well supplied by the secondary market," said Vivienne Lloyd at Macquarie.
"I think it's entirely feasible that you'd see zinc moving into the premium position again over lead because it has the stronger fundamentals eventually."
Brown expects the zinc price to average $2,185 a tonne this year and $2,450 in 2015, while Briggs expects zinc to surge to $2,300 by late this year and $2,500 by the middle of next year.
Trading the zinc/lead ratio and spread is difficult, however, due to uncertainties in the lead market, said Brown.
Lead recycling in North America is shifting to Mexico from the United States and significant amounts of secondary lead are appearing in China, although it was unclear if those supplies were being imported or being generated domestically, he added.
"For us, it's a very easy call to be long zinc, it's less clear to us what happens to lead prices. It's hard to know exactly where that price ratio will end up," Brown said.
Briggs is also shunning the lead/zinc ratio, instead advising clients to go long zinc and short copper due to surpluses developing in that market.
He forecasts the copper/zinc ratio to move to 2.5 from 3.1 currently and compared with 3.58 at the start of the year.
Briggs is also suggesting investors buy out-of-the money call options in zinc at a strike of $2,500 for the fourth quarter or December of this year.
Three months zinc
The flip in the relationship of the metals has been swift - less than two months ago lead was $106 more expensive than zinc.
Zinc traded slightly higher than lead briefly during 2012, but it has not sustained a large premium since 2010, when it was $245 stronger at one point.
The two metals are usually found in the same mines and their spread and ratio are traditional trading strategies.
While both metals are due to record deficits this year, recent data from mining companies has shown that shortages in zinc are due to be more severe than in lead as big mines come to the end of their commercial lives.
"We think it's completely right that zinc should outperform lead," said Nic Brown, head of commodities research at Natixis.
"You have an abrupt halt in growth of zinc supply whereas lead has been substantially less affected than we had anticipated."
Zinc's deficit in the first four months of the year expanded to 107,000 tonnes while lead's shortfall was only 12,000 tonnes, the International Lead and Zinc Study Group said this week.
Brown has forecast a deficit this year in zinc of 476,000 tonnes, at the top end of analyst estimates, while he has pencilled in a lead deficit of only 45,000 tonnes.
The combined loss of zinc output at four major mines that are closing - including Century in Australia and Lisheen in Ireland - is over 1 million tonnes by next year, according to metals strategist Stephen Briggs at BNP Paribas.
These losses will only be partially offset by new mines starting up, he added.
RECYCLING BOOSTS LEAD SUPPLIES
Although lead is also produced at the same mines, that market may not be as seriously affected largely due to the big market in recycled metal, mostly from lead batteries.
"These mine closures hit zinc harder because lead is so well supplied by the secondary market," said Vivienne Lloyd at Macquarie.
"I think it's entirely feasible that you'd see zinc moving into the premium position again over lead because it has the stronger fundamentals eventually."
Brown expects the zinc price to average $2,185 a tonne this year and $2,450 in 2015, while Briggs expects zinc to surge to $2,300 by late this year and $2,500 by the middle of next year.
Trading the zinc/lead ratio and spread is difficult, however, due to uncertainties in the lead market, said Brown.
Lead recycling in North America is shifting to Mexico from the United States and significant amounts of secondary lead are appearing in China, although it was unclear if those supplies were being imported or being generated domestically, he added.
"For us, it's a very easy call to be long zinc, it's less clear to us what happens to lead prices. It's hard to know exactly where that price ratio will end up," Brown said.
Briggs is also shunning the lead/zinc ratio, instead advising clients to go long zinc and short copper due to surpluses developing in that market.
He forecasts the copper/zinc ratio to move to 2.5 from 3.1 currently and compared with 3.58 at the start of the year.
Briggs is also suggesting investors buy out-of-the money call options in zinc at a strike of $2,500 for the fourth quarter or December of this year.
