Zinc and aluminium were at parity on the London Metal Exchange on Thursday for the first time in over 13 years, with zinc more than 20 percent higher since the start of 2006, supported by runaway fundamentals.
Demand for zinc-coated steel for construction, vehicles and household goods from booming economies like China, India and Brazil, as well from the traditional markets means that zinc smelters are enable to produce enough metal to meet world needs.
Dealers said that at one point on Thursday aluminium and zinc were both quoted at $2,410 a tonne. But by midsession dealing on Friday, three-month aluminium futures had rallied to $2,465 and zinc had eased to $2,355.
"Given zinc's superior fundamentals opposed to aluminium, the historical discount of zinc could become just that - historical," UBS analyst Robin Bhar said.
The last time zinc was at a premium to aluminium was in the third quarter of 1992.
"Traditionally, higher costs - energy inputs in particular - have meant aluminium has been more expensive than zinc, but that isn't the only factor which that is determining prices," Bhar said.
Bhar added that zinc production costs were also being pushed up due to the high price of concentrates which are smelted into metal, but most of the price strength was due to demand.
According to data from the International Lead and Zinc Study Group, the world zinc market was in deficit by 432,000 tonnes in 2005 and analysts said it would be in deficit by another 400,000 tonnes.
Zinc stocks on the LME totalled 324,625 tonnes on Friday, of which 154,650 tonnes or 47 percent were on cancelled warrants and ear-marked for delivery.
The remaining 169,975 tonnes are equivalent to just under six days of global consumption.
Aluminium stocks were 779,100. By contrast, just 52,125 tonnes of aluminium are on cancelled warrant and the remaining material is equivalent to 8.3 days of global use.
"Arithmetically this is an interesting development and this might attract a bit of speculative interest. But (zinc and aluminium) aren't hugely competing metals," a dealer said.
"Zinc could move to a premium above aluminium, but it is not like platinum and palladium where there is considerable substitution."
Zinc's primary application is in galvanising - a corrosion-resistant coating for steel, for use in automotive and construction applications.
Aluminium is used on its own in a variety of sectors from transport and aerospace to construction and packaging and although applications overlap, the two metals are not direct substitutes.
GLOBAL GROWTH:
In a weekly report Calyon analyst Maqsood Ahmed said: "The metals market remains resilient, having once again weathered a good volume test on the downside over the last week."
"On the macro front, data suggests we are currently going through synchronised world growth with the United States, Europe, Japan and China all contributing to the demand side," he said.
Both zinc and aluminium respond similarly to increased economic growth as demand for transportation and construction increases.
Global aluminium output was around 31.3 million tonnes in 2005 versus 10.3 million tonnes of zinc.
Turnover of aluminium on the LME is typically 5,000-6,000 lots on the exchange's screen trading system, while zinc volumes are 1,500/2,000 lots.
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