LONDON – A sharp rally in zinc prices is posing the threat that industrial users will find ways to substitute the metal with cheaper alternatives or use less, curbing overall consumption.

High prices may also dampen a nascent move by Chinese automakers to use more zinc for galvanising, while the Western car sector could employ thinner coats of zinc alloys to help meet tough emission rules by cutting vehicle weight.

"We expect zinc prices to carry on going up for at least another 12 months, so I think there's clearly a growing risk of demand destruction in some shape or form," said analyst Andrew Thomas at consultancy Wood Mackenzie.

Benchmark zinc on the London Metal Exchange has doubled since January last year, hitting a peak of $3 231.75 a tonne in late August, the highest in a decade.

Analysts say prices would have to remain high for around six months to spur substitution, but many expect shortages to become more severe, further lifting values.

Wood Mackenzie forecasts zinc will average $3 875 next year, up a quarter from $3 097 a tonne at the close on Monday.

"The longer prices stay above these rarefied levels, the more chances of demand being whittled away," said Robin Bhar, head of metals research at Societe Generale in London.

SLOWER PENETRATION IN CHINA?
More than half of global zinc consumption is used for galvanising steel to protect it against corrosion.

In the Western auto industry, the bulk of steel is galvanised because manufacturers typically give consumers ten-year corrosion guarantees.

In China's booming auto market, galvanising accounts for less than 20 percent of the sector, but it is growing quickly.

"My biggest concern is related to market penetration in the automotive sector," Thomas said. "We've seen quite robust demand from the Chinese auto sector over the last two to three years, so it's not inconceivable that high zinc prices could slow the process."

Another threat is alloys that combine zinc with aluminium and/or magnesium, allowing galvanisers to reduce the thickness of coatings by up to half while retaining corrosion protection.

Some of the alloys are Magnelis, which is produced by the world's biggest steelmaker, Arcelor Mittal, as well as Galfan and Galvalume.

"In galvanising, you would see a move towards thinner coatings, so you could see the amount of zinc per tonne of sheet decreasing," said Helen O'Cleary, senior consultant at CRU.

High prices could be an added incentive for automakers to switch to thinner coatings, which would help them cut vehicle weight in order to boost compliance with strict pollution laws.

Although substitution is usually gradual, the warning signals are flashing now that prices have surmounted $3 000 for the first time since 2007.

"Certainly the galvanisers are saying that when the price goes above $3 000 it is more difficult for them to pass on the zinc surcharge (to customers)," O'Cleary said.

"No one's panicking at this level, but the conversation is being had, particularly in the die casting sector, where generally it's easier to substitute."

Die casting, in which molten metal is moulded into components, accounts for around 10% to 15% of zinc consumption.