Page 167 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes

Case Study End of Equilibrium in Zinc Market

Undisciplined production behaviour in the market caused a significant surplus in zinc, but
the surge in prices has hitherto successfully managed to dodge the oversupply. This clearly
points out to the conspicuous gap between the underlying fundamentals and the current
price level.
Current prices of Zinc still render mining lucrative and have kept the production line not
only active but also rising. The International Lead and study Group (ILZG) talks about a
number of new projects that are expected to come online during 2011in its latest press
release. Mining projects in countries including Australia, Canada, India, Saudi Arabia,
Tajikistan and Uzbekistan.
Apart from the new projects, production is expected to rise in mines located in China,
Kazakhstan, Mexico, Russian Federation and Mexico. The total rise in production is
forecasted at 13.44 million tonnes, up 9.1 percent.
The ILZG has also mentioned the development in the demand side, which is significant,
but impossible to absorb the surplus, at least this year. The demand for Zinc is forecasted
to rise towards 13.4 million tonnes, up 6.3 percent. At the same time, oversupply is expected
to rule at 200,000 tonnes for the year 2011.
Stocks of zinc at the London Metal Exchange and Shanghai futures exchange, on the other
hand, are at more than comfortable levels. However, like aluminium, stocks are stuck in
what is called ‘inventory financing’ deals, causing an artificial tightness in the market.
These financing deals also might have complemented the price rise.
China continues to import the metal in spite of its inventories scaling above the reported
1.5 million tonnes in warehouses. However, the credibility of the rising imports is
questionable, for it’s unclear whether imports happen because of demand or due the
arbitrage window that opens up from time to time.

The role of China undoubtedly plays a large role in zinc prices. ILSG has forecasted
demand of china to rise 9.1 percent this year. But the rising inflationary pressure could cap
the buying interest of the country.
Question:
What factors are expected to create this disequilibrium?

Source: www.commodityonline.com

Self Assessment

State whether the following statements are true or false.
14. The interest rate and level of output are determined by the interaction of money (LM) and
commodity (IS) markets.
15. The increase in autonomous spending increases the level of income.
16. With a fixed supply of money, the interest rate has to fall to ensure that the demand for
money stays equal to the fixed supply.

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