Zinc seen as best metal pick

Global markets were battered brutally in January, the worst since the financial crisis in 2008.

Circuit breaker mechanism, which was introduced in January to cushion the Chinese equity markets from excessive volatility, ironically spurred panic and hurt global market sentiments. Amidst such gloom, the only metal which stood the test of time was zinc, thanks to the supply tightening measures by major producers.

Australia’s giant Century mine and Ireland’s Lisheen mine ultimately called it off earlier this year after proposing output cuts in 2014. Mining company MMG exported its final shipment of zinc concentrate from Karumba, marking the end of production at Century Mine, one of the world’s largest zinc and lead deposits.

Another major support came from Switzerland-based mining and trading giant Glencore’s decision to mothball around 500,000 tonnes per year of mining capacity, mostly in Australia and Peru, apart from Europe’s biggest zinc producer Nyrstar’s suspension of its 50,000-tonne-per-year Middle Tennessee mines.

This is in addition to Glencore’s announcement in October 2015 that it will cut 500,000 tonnes of annual zinc production, equivalent to around four per cent of global supply.

Furthermore, Horsehead Holding Corp, a large US zinc producer, which has been operating for around 150 years, filed for Chapter 11 bankruptcy on February 2, hurt by slump in metals prices and a shortage of cash.

Owing to such aggressive supply reductions, Treatment Charges (TCs) or fees paid by miners to smelters to process raw material into metal has tumbled to around $125 a tonne from $220 a few months ago.

Higher imports

The closure of major zinc mines has reduced supply, resulting in lower treatment fees charged by smelters.

This shows that the concentrate is not as readily available as last year but imports show a positive trend as steel mills gear up for the Chinese production of galvanised steel products.

Recent data released by the General Administration of Customs showed refined imports of zinc soared by 150 per cent in January.

Zinc imports surged by 440 per cent in December 2015 after shipments nearly quadrupled in November and almost tripled in October. Taking tightening measures into consideration, Mitsui Mining & Smelting Co., Japan’s top zinc supplier, stated that zinc market balance is likely to shift to deficit of 440,000 tonnes, the most in more than a decade and prices likely to surge by about a third in 2016.

Along with supply constraints, demand prospects too brightened as Chinese car sales were up 9 per cent year-on-year in January after rising 13.4 per cent in the fourth quarter of 2015 from the corresponding period of last year. Global automotive market is a large component of demand for zinc and numbers show the industry remains robust.

Overall, output cuts and anticipation of higher deficit in 2016 place the grayish white metal in a win-win situation.

Hence, we expect zinc prices to trend higher from a two-month perspective and LME zinc (CMP: $1,808) prices can possibly head higher towards $2,000/tonne while MCX zinc (CMP: ₹121.35) prices may surge towards ₹140/kg as rupee depreciation towards 70-mark will also be a supporting factor.

The writer is Associate Director – Commodities & Currencies Business, Equity Research & Advisory –Angel Broking. Views are personal.

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