Zinc Falls as Chinese Buying Fails to End Global Supply Surplus

By Claudia Carpenter

Jan. 14 (Bloomberg) -- Zinc fell in London on speculation that China’s stockpiling of the metal won’t be enough to erode a global supply surplus. Copper, aluminum and nickel also dropped.

China’s State Reserve Bureau, the country’s stockpiling agency, will buy 59,000 metric tons of zinc from domestic smelters, two company executives said. London Metal Exchange- approved warehouses hold 268,900 tons of zinc, the most since April 2006, as demand from steelmakers falls short of output.

“The biggest impact of the China purchase is on the smelting community because it allows them to continue to operate and not fire people,” said Michael Widmer, a BNP Paribas SA analyst in London. “The only difference to the market is that the surplus will be in the warehouses of the Chinese government, not in LME warehouses.”

Zinc for delivery in three months declined $44, or 3.4 percent, to $1,265 a ton as of 12:45 p.m. on the LME. The rust- resistant metal used to coat steel may drop to $1,000 in the second quarter, Widmer said. Zinc output will exceed demand by 300,000 tons this year, compared with a surplus of 318,000 tons last year, he estimates.

U.S. steel mills operated at 44.5 percent of capacity in the week ended Jan. 10, down from 90.3 percent a year earlier, according to the American Iron and Steel Institute. Production was down almost 51 percent. Global steel demand may take three years to recover, Nippon Steel Corp. Chairman Akio Mimura said on Jan. 6.

Copper dropped $60, or 1.8 percent, to $3,312 a ton after jumping 3.9 percent yesterday. The credit-rating of Santiago- based Codelco, the world’s largest copper producer, was cut one step to A1 by Moody’s Investors Service, citing “weak copper prices and continued cost challenges.”

Copper Declines

Copper has dropped 55 percent in the past year as recessions in the U.S., Germany and Japan curbed demand from builders and manufacturers.

“The market’s looking like it will be depressed for a reasonable part of 2009,” said Shiv Madan, a metals trader at Dresdner Kleinwort in London.

Aluminum declined $21 to $1,494 a ton, the third consecutive drop. Nickel fell $575 to $10,700 a ton and lead dropped $29 to $1,150 a ton. Tin fell $180 to $11,420 a ton.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net