Zing could soon be back in zinc

While most industrial metals have posted solid gains of late, zinc continues to be a laggard and is headed nowhere. It continues to trade in a broad range between $2,100 and $1,820 a tonne. The story of the zinc market being in deficit has been around since the start of the year. However, this hasn’t caught the frenzy of market participants as they are still eyeing high zinc inventories. There are a lot of player sitting on the sidelines waiting for the momentum to set in and participate in the move, as rallies in zinc are sharp and rare.

The year started with zinc prices heading north, but then they pulled back alongside copper on concerns that collateralised copper held against bank loans in China’s shadow banking industry might be liquidated. Since zinc has also been used as collateral, it too fell, with both metals retreating around 10 per cent.

The situation echoes rising premiums in the aluminium market, where costs to obtain physical material have once again risen following a brief slowdown. Premiums for metal in Singapore warehouse have climbed to $170-185 from $160/tonne a month ago.

Global mine output rose by one per cent year-on-year to 13.20 million tonnes (mt) in 2013. Increases in China, US, Peru and India were offset by fall in output at Canadian and Peru mines. Refined production rose 2 per cent to 12.90 mt, where Chinese output grew 4.5 per cent offsetting slowdown elsewhere. Chinese output slowdown is a worrying factor, as from 12 per cent in 2012 it dropped to a meagre 4.5 per cent, whereas it continues to be the largest consumer of the metals accounting to 45 per cent of the total demand. Chinese mine output increased 9.8 per cent, while metal output increased 5.7 per cent.

The shock comes from sudden mine closure in the last couple of years, where three of the 10 top zinc mines are going off stream, and the contribution from these mines would be close to 12 per cent of the total output. Ramp up of new projects during the year is expected to increase mine output and offset some fall in output due to scheduled closure of major mines later during the year.

Century, which is one of the biggest zinc mines, will stop production in mid-2015 which could have a serious effect on the supply. There are a few mid-size mines which are expected to start production, but that will not happen until mid-2015, making the zinc market situation tight for 2015.

In the hindsight, the prospect of vast quantities of zinc being released into the market from China is a real threat, as the metal’s role as collateral for a range of financing activities comes under greater regulatory scrutiny.

Zinc demand rose 4.7 per cent y-o-y in 2013 to 12.98 mt, with major consumer being China with a 70 per cent rise in consumption. Demand in China climbed 7.6 per cent in 2013 to 5.748 mt, while production was 5.1 mt, creating a deficit.

Roughly, China consumes 45 per cent of global zinc, Europe 17 per cent, US 7 per cent and Japan 4 per cent. So, the start of a recovery in Europe will be a significant development for the zinc market. The latest forecast shows a rise of 4.5 per cent in zinc demand, amounting to 13.58 million tonnes. Demand may, however, struggle to reach this level.

With Chinese growth rates slowing and credit being restricted, demand for zinc and metals, in general, may well suffer more than is currently expected. But aggressive steps to stimulate the economy may make up for the loss. European demand which was subdued last year may see a recovery particularly from the auto industry. Auto sales have been picking up and are closer to peaks seen in 2007. Robust growth in demand can be expected if the construction and housing sector start to contribute along with auto.

At the moment, things are pretty balanced; but as we move ahead, mine closures and slower pace of addition will start to add to the demand-supply squeeze. Market is now focused on ILZSG data, which shows a deficit from a surplus earlier in the 2013. ILZSG reported a supply surplus of 38,000 tonnes in January-September, but a 2,000-tonne-deficit in January-October in its December release. The latest data now suggests the zinc market was in a deficit of 68,000 tonnes in 2013, with January this year in a deficit of 60,700 tonnes.

LME zinc stocks fell to a low of 7,00,000 tonnes in the first quarter from 9,31,000 tonnes at the end of last year. The drawdown was thought to be partially due to metal moving to China. Stocks in Shanghai also stand at a 5-year low at 2,25,468 tonnes. Although LME stocks have been trending lower, there is still a lot of metal as much of it has been parked into off-market financing deals, which may some day come into actual use.

Going by the current speed of global growth recovery, zinc demand should remain steady. A spate of mine closures scheduled from the middle of next year looks set to become an increasingly-significant price driver. Global metal consumption looks set to gallop steadily higher; and output from key mines is not likely to be replaced for some time, making it a solid price appreciation story. We see a possibility of zinc outperforming other industrial metals over the next few months. Although the above case puts up a strong case for a rally in zinc prices, but given high stocks and the potential for offmarket metal to return later in the year, rallies are expected to be under check.

Zinc prices are expected break past the consolidation, and can head towards $2,200 and eventually towards $2,320. This move will not unfold immediately, but gradually as we enter into the next quarter, we might see the story unfolding. On the MCX, a dip towards ₹116 should be used as an opportunity to accumulate targeting ₹137-141 on the upside.

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