THE COST OF ZINC

Since zinc is traded on the London Metal Exchange (LME), and zinc quality brands registered by producers with the LME can be traded and the zinc stored in many registered warehouses around the world, zinc is a true mature commodity traded in a free market. Apart from being used as a basis for trading zinc held in warehouses, the LME free market pricing is also used as a basis for pricing zinc sold from producer to consumer as well as a basis for pricing zinc concentrates, the raw material used for producing zinc and sold from zinc miners to zinc smelters. The price of zinc concentrates (which may be higher or lower than the cost of producing concentrates) is closely linked to the price of zinc (which may also be higher or lower than the cost of production) but the pricing formula for concentrates is also affected by the perceived supply and demand of the concentrates themselves.

Through the years 2001-2004 the price of zinc was at historically low levels, expressed in US currency, being generally in the range $800-900/tonne. These low prices were the result of a sustained over-supplied market and, whilst some smelter closures have taken place, other new smelters, generally in the emerging-developing world, started up. In 2005 supply became more balanced. The main driver for this was, however, the closure of some zinc mine capacity, resulting from the low zinc price. This meant that the production of zinc metal has been controlled by the availability of zinc concentrates. Stocks of zinc metal have fallen and the zinc price responded by rising in 2005 and 2006, the average for 2006 being $3274/tonne.

The cost of producing zinc consists of two parts, the first part being the cost of the raw materials to produce the zinc, this part being linked to the zinc price. The second part is the cost of converting the zinc concentrates to metallic zinc for sale, this being affected more by local factors such as energy and labour costs where the smelter is located. Typically in 2006 the cash cost of producing zinc was $2460/tonne, raw materials accounting for $1970/tonne and conversion $490/tonne. Against a background of a LME average price of $3274/tonne, all smelters in 2006 which could obtain raw materials, were in profit. And 2007 is proving to be a year of similar profitability as 2006.

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