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Domestic producers may be hit

Suresh Krishnamurthy

Zinc prices in the international markets have been retreating relentlessly in the last few months. At the end of June, prices have dipped to $870 per tonne from the levels of $1,018.50 per tonne at the beginning of the year.

After settling past the $1,200-per tonne mark briefly in the late 2000, prices have been moving only one way and that is down.

For Indian producers, the initial drop in prices below the $1,000-mark at the international level was not a cause for concern since domestic prices were anyway below that of the landed cost of imports.

Moreover, the depreciating rupee also provided a reasonable amount of cushion. Now, however, with prices staying below $ 900 per tonne, domestic producers may be hurt. They may be forced to revise downward their prices as imports now have the potential t o become competitive.

The outlook in the short-term appears bleak for several reasons. The slowdown in the US has obvious adverse implications for demand. At the same time, supply does not appear to be tightening.

If anything, the Chinese factor is threatening to be another dampener. Chinese smelters have actually raised output at a time when zinc prices were already trending down.

In the past, the Chinese increased output when prices were rising and retreated from the markets when prices declined providing a measure of stability to prices. Now, however, the story is different and do not augur well for zinc price stability.

For the Indian companies, the only comforting factor is that domestic production is substituting imports and in addition, domestic zinc production is growing steadily at the rate of five to six per cent.

As such, even if realisations decline, prospect for improving volumes is strong. The demand-supply gap in the country is actually expected to be around 1,25,000 tonnes in providing a strong cushion to local producers. This, however, can offset only to a reasonable extent any decline in realizations.

The time appears ripe for exercising caution in assessing the near-term prospects of Indian zinc producers. From a long-term perspective, it may be important to keep in mind that the cushion provided by national demand-supply shortfall might exist only in the next few years.

This is because both the Indian zinc producers -- the State-owned Hindustan Zinc and private sector player, Binani Zinc -- have capacity expansion plans.

This can reduce the national demand-supply gap substantially. Once this happens, the linkages of domestic producers with international prices can be expected to strengthen. What can then work to their benefit is only a revival in global demand for zinc a nd that, at this moment, seems to be way off.