Zinc – it has potential for further upside

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Zinc prices heaved to multi-month highs in key markets despite a sharp correction seen in other base metals in the complex.  Prices surged to a nine-month high in the key London Metal Exchange (LME) platform while in MCX it is convincingly placed above the psychological resistance of Rs 200 a kg. Performance in Shanghai Futures Exchange was also not different. Worries over tight supply and hopes of resumption of US-China trade talks broadly supported the sentiments.

Zinc was one of the worst performing non-ferrous base metals in LME last year, shedding more than 25 percent. Trade tensions between US and China, fears of supply glut and a strong dollar weighed down the trend. However, since the beginning of the year, prices recovered most of its previous year’s losses gaining more than 18 percent so far.

Declining global inventories are raising concerns over supply shortage of the metal in the near future. Stocks in the LME warehouses recently plummeted to its lowest level since 2007. Due to seasonal accumulation Chinese ShFE warehouse inventories are currently placed at three month high, but the overall inventories are still at multi year lows. As per seasonal pattern base metals demand in China is likely to pick up during the second quarter onwards and it usually reflects in warehouse stocks.

China is the world’s largest zinc producer. Additionally, the country is the top consumer, accounting for about half of the global consumption. The ongoing trade war with US has adversely affected the Chinese manufacturing sector and apparently the demand for base metals.  The latest data shows that Chinese industrial firms posted its worst slump in profits since late 2011 indicating the trade war with US has adversely impacted their economy.

However, amid slow industrial growth, there is widespread optimism about economic stimulus measures from China that could boost demand for base metals and support prices later. Recently Chinese officials promised broad policy changes to prevent economic slowdown and boost growth. There are also expectations that the seasonal demand for zinc is poised to increase soon. Usually the key consumption season starts at the end of the stock accumulation period and the Chinese New Year.

China’s demand for zinc is primarily from strong property sale and government’s push for more infra projects. The metal is largely used for galvanizing steel, hence, about 50 percent of global demand is from the construction industry. Transportation, infra, industrial machinery and consumer products are the other areas of demand for the metal.

Looking ahead, the progress of trade talks, warehouse inventory levels and global economic outlook are likely to influence the metal’s price. A positive deal on trade talks would prompt traders to bet on base metals again. Along with LME stocks, if Chinese ShFE stocks too starts depleting, it may further buoy the near-term positive outlook of the commodity.

On the price front, in LME, the ongoing positive bias is likely to continue as long as prices stay above the stiff support of $2590 a tonne. And if prices move above $3000 a tonne, it would trigger the next wave of bullish sentiments in the counter. In MCX, an initial dip cannot be ruled out due to a strengthening rupee but it is likely to consolidate and edge higher later.

Posted on 08 April 2019

The article first appeared in Moneycontrol.com

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