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Zinc prices surge as global production tightens

Zinc prices surged to a three-week high Friday after the world's largest miner of the metal, Glencore PLC, announced production cuts equivalent to around 4% of the world's total annual supply.

But analysts said the longer-term outlook for zinc remains shaky, amid ongoing concern about the strength of demand for the metal used primarily in steelmaking.

Glencore earlier said it would cut its annual zinc production by 500,000 metric tons, including closing its Lady Loretta mine in Australia and Iscaycruz mine in Peru.

Following its announcement, three-month zinc prices on the London Metal Exchange rose 6.7% to an intraday high of $1,780 per metric ton, before easing slightly to $1,775/ton. Lead, which is mined together with zinc, was up 4.5% at $1,748.50/ton.

Friday's jump marks a sharp turnaround in the metal's fortunes since it slumped to a five-year low of $1,601.50/ton on Sept. 28.

"We had a slight deficit and this...tightens up the market significantly, " said Daniel Hynes, base-metals analyst at ANZ Bank. "I think the rally has a pretty good chance of being sustained, but there are demand side concerns."

Total global supply of zinc runs to around 14.5 million tons, and the global market was estimated to be in deficit of around 150,000 tons this year before Glencore's announcement, he said.

China accounts for nearly half of total global zinc consumption. The country's weak economic outlook has hit prices of the metal hard this year. Chinese steel-producers, the largest in the world, have stepped up their overseas sales as their output has started to outpace domestic demand.

But establishing new markets overseas is proving to be challenging as other countries have raised tariffs to protect their own steel industries.

"If demand does not increase, then it would be tough for zinc prices to sustain the momentum," said Daniel Ang, an analyst at Phillip Futures. "Zinc is mostly used in complement with other metals, and if prices of those metals don't increase, zinc won't run past them."

Besides steel, zinc is also used with copper for manufacturing brass.

Three-month copper prices on the London Metal Exchange also rose to a two-week high of $5,257.50/ton on Friday, before dropping to $5,245.50/ton in late Asia trade. The price gain was prompted by dollar weakness after minutes from the Federal Reserve's September policy-meeting showed it adopting a dovish tone on the economy, which traders interpreted as a sign that interest rates won't be raised soon.

However, the effect of a weaker dollar on copper is "unlikely to last long," said Mr. Ang.

Prices of copper have been trading just above a six-year low, even though Glencore last month said it would halt production at two African mines that together produce 400,000 tons of copper a year.

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