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May 27, 2017

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China's drivers will increasingly demand rust-proof cars. That's good news for the price of zinc, the anti-corrosion fighter that's already this year's top performer among base metals.

Annual passenger vehicle sales in China will rise to 24 million units in 2020, from 19 million last year, McKinsey & Co forecasts. Only about a third of locally-manufactured autos use galvanized panels to prevent corrosion and rusting, according to Heron Resources Ltd, a developer that's joining rivals who are building or reopening zinc mines.

"You have got the largest growth market in the world for vehicles and people will continue to push for higher product quality," according to Wayne Taylor, chief executive officer of Sydney-based Heron, which is planning to reopen a zinc operation in Australia that was shuttered in 1998 on low prices. "It's difficult to see, without a collapse in general commodities consumption, that zinc is going to back off."

Zinc has rebounded this year on demand growth and a supply crunch, amid production cuts by Glencore Plc and closures including MMG Ltd's Century mine that have curbed supplies from Australia to Ireland. Zinc market fundamentals are on a strong footing, and likely to sustain the price rally for the next few quarters, according to Hindustan Zinc Ltd, Asia's biggest base metal producer by market value.

Domestic automakers in China, where more vehicles are sold each year than the United States and Japan combined, rarely use galvanized steel, according to the International Zinc Association. Switching to the material would require about 350,000 metric tons a year of additional zinc, the association estimated last year. A similar move in India would need an extra 150,000 tons annually, it said.

Demand from China's automakers will support continued zinc consumption growth, while more existing mines are reaching the end of operations as they are depleted, Heron's Taylor said in an interview. "These things ultimately have to be replaced and there isn't a pipeline of projects that can sensibly cover off what is an aging production base," he said. "We also continue to see consumption growth, it may not be quite as strong as it has been in some years, but still Chinese consumption growth is increasing."

The key downside risk to the zinc market in 2017 is a faster-than-expected restart of idled mine capacity, Citigroup Inc said.

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