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Zinc and Lead and LME Spot and Supply and China and Adam Smith

I've been watching the Zn spot pretty closely for the last few days, waiting for a moment to jump in. I thought the chance had gone begging when spot shot to 90c/lb, but here we are again back at 80c/lb, as the nice people at kitco show with their nice charts.

But there was another interesting development in Zinc and Lead on Monday (cos when it comes to supply, the tow metals walk hand in hand) , and Benito at South-South Cooperation has picked up on it (I knew he would..can't miss a story like this). Check out the link for the full story, but basically the internal Chinese Zn/Pb sector is cutting back production by 10% to shore up prices. Also the note makes a no-so-subtle suggestion that China is mothballing Zn/Pb mines due to the low prices.

What does this mean? Well in the very short term it won't affect spot Zn, but what this is doing is drawing a line under today's prices and saying, "This is as low as we go, boys." With costs rising and spot at 80c there are many Zn/Pb mines that will be running at a loss and will eventually take the temporary closure option. That goes for all around the world, not just in China, dude. Here are some back of ciggie pack numbers to tune you in a little bit:

Mines that run a 10% Zn headgrade ore will still make plenty profit (quick calculation: $60 per tonne cash cost....100kg of zinc per tonne....220lbs....80c/lb.....$176 gross revs....$116 gross profit.....SGA, capex, tax.....$40/MT net for it?)

Mines that run a 3% Zn headgrade won't like zinc prices right now (quick calculation: $60 per tonne cash cost....30kg of zinc per tonne....66lbs....80c/lb.....$52.8 gross revs.....need I say more?).

These very ballpark numbers show what a fundamental line in the sand looks like. It doesn't take into account the polymetallic nature of most zinc-containing ore, neither does it make adjustments for different costs, tax rates and a multitude of things. It's just a sketch. But all the same, as demand is likely to pick up going into the last quarter of 2008 and supply begins to dry up (the South-South post goes into more detail on the demand side, too), there's plenty to suggest that Zn is putting in a bottom here. Pure Adam Smith stuff.

So what with the low spot prices putting pressure on supply, China already responding to the pressure by dropping production and plenty of other mines likely to follw suit, I think it's about time you took a second look at the beaten up zinc/lead sector and picked up a bargain or two. I like buying when everyone else is selling.....has always worked well for me.