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zinc forever.....

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    Getting that zincing feeling: Dryblower

    Tuesday, January 25, 2005
    AUSTRALIA'S zinc producers are rejoicing today because the zinc price is heading north – but one of the reason for the rise to a seven-year high is actually a darkly ominous warning for all believers in the China miracle continuing forever.

    As Dryblower understands, reports from the field suggest a worsening electricity shortage has forced one of the country's biggest zinc smelters to cut production by a third.

    The smelter involved is not a backyard operation like so many Chinese metal shops. The Zhuzhou Smelter Group speaks for a cool 3% of annual world refined zinc production.

    For anyone not quick at arithmetic that means about 1% of the worlds, not just China's, zinc-smelting capacity was turned off last week because there's not enough power to keep the business operating at full capacity.

    At this point Dryblower's reader (he assumes there is at least one of you out there) says "so what, a price rise is a price rise, so stop complaining you old fool".

    Well, you see, that's not quite true. A genuine price rise is caused by genuine demand exceeding genuine supply and what we have in China on this occasion is an artificial supply disruption.

    In fact, it is more than that. It is a supply disruption caused by a shortage of what remains, arguably, the critical element in a modern, and growing, economy – electricity.

    Think about it for a moment as you rush out to load with shares in Kagara, Zinifex, CBH and Perilya. The very issue that is pushing up the price of their product, and their share price, is the same issue that could stop the Chinese economy stone dead in its tracks.

    The electricity crisis in China has been worsening for the past three years. There have been repeated reports of factories being forced to work at night when electricity supplies are available, and of some factories being forced to close altogether.

    But, the zinc smelter switching off a third of its capacity is the first time Dryblower has heard of a crucial industrial raw material being effected by the shortage.

    What does all this mean? Well, the obvious short-term answer is rejoice because a zinc shortage is a zinc shortage and can only do wonderful things for the price of the metal and the price of zinc company shares.

    That fortuitous situation, however, might not last long because cutting off supply at the smelting level will cause pressures to build on both sides of the equation.

    First, it may cause Chinese raw material buyers to slow their activities simply because there's no point in shopping for zinc concentrate in Australia or Canada if the factory is working at two-thirds capacity.

    Second, the electricity shortage in China is hurting more businesses than zinc smelters. Everyone from Mr Chan's corner deli in Beijing, to the No.1 Ferrous Metal and Ladies Underwear Factory in Shanghai is being hurt by an inability of the Chinese electricity industry to keep the lights on.

    At this point, even Dryblower's dog (which sits ready for a hunt through the next batch of quarterly reports for non-JORC code compliant comments) can see the deeper point behind the booming zinc price, and the looming future problem.

    It is in fact this simple. Shortages, whether they are of electricity, water, traffic lights or railway capacity, are the single biggest issue that could bring the China miracle to a grinding halt.

    The country, which has driven up the price of all commodities, is already feeling intense pressure because its creaking infrastructure and appalling environmental pollution problems have placed strains across all levels of society.

    The king hit, which could cause a monumental economic traffic jam, and kill the goose for miners around the world, is an electricity shortage that has no quick fix like switching factories onto the night shift.

    Today's zinc price boom really has the look of a double-edged sword.

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