“If the present tries to sit in judgement of the past, it will lose the future.” – Winston Churchill
Several western zinc mines have recently closed or are running out of ore quickly. Glencore recently announced that its zinc production fell 18 per cent to 306,000 tonnes as two of its mines have reached the end of their lives. Vedanta’s Lisheen zinc-lead mine in Ireland has probably only 12 months to run. China’s ability to ramp up its zinc supply has stalled and will likely go into reverse as its more easily discovered near surface deposits are exhausted and it grapples with its huge pollution problem. In the rest of the world it will take time to develop the few larger zinc deposits in the pipeline because several are in remote locations and will require substantial infrastructure development. The pipeline of new zinc projects has become a capillary tube.
So what about demand? The IMF have identified key income levels at which we can expect a switch in metals consumed. Demand for basic and low grade metals such as copper and iron will start to grow more slowly to be replaced by metals like zinc, aluminium and tin. This will occur as the development of the economy in China takes shape and the pattern of economic activity changes. The largest companies in the mining sector have strategically bet against this future focusing on copper and iron ore. James Hutton (1726 -1797) a Scottish geologist and physician who develped the theory of uniformitarianism – a fundamental principle of geology – based on the premise that the “present is the key to the past”. It seems to me that the leaders of the planet’s major mining companies have projected this principle and believe that the “present is the key to the future” and so the growing focus on copper and iron at the expense of zinc, aluminium and tin.
The market seems to have a Pavlovian reaction to the regular feed of sometimes contradictory economic trends and indicators from China which it sees as the tea leaves which will predict the future demand for metals . So iron ore fell to a 20-month low on Friday about “persistent concerns about rising supplies” and general bearish signs from the Chinese steel industry. We have seen what can happen suddenly with the nickel price as it responds to the growing impact of a change in policy from a major supplier such as Indonesia. The economist James Gant said that risk is most threatening when it’s least obvious, and least threatening when it is most obvious. Last week Lloyd Blankfein, the chief executive of Goldman Sachs said “I would say with complete and utter confidence that nobody knows anything and we (Goldman Sachs) are prepared for a market that stays this way and we’re prepared for a market that’s lower and we’re prepared for a market that’s more volatile.”
McKinsey consulting says that what it calls the “Upper Middle Class” in China as a segment of the population with annual household incomes of netween $17,350 and $37,500 accounted for about 14 percent of urban Chinese households last year but will account for 54 per cent of households in less than a decade. The migration of the Chinese to cities is creating a new city or suburb the size of Philadelphia every month. Is this the short-term colliding with the longer-term. The collapsing of time or telescoping of events with a rapidity never seen before in the history of mankind. We do not know where this is heading and I suppose that is the point but what we do know is that this demographic and rapid urbanisation trend in China needs metals and a change in the mix.