Commodities

Zinc crosses $2,600/tonne, but will it sustain?

Rajalakshmi Nirmal Suresh P Iyengar November 5 | Updated on November 05, 2020

Scores of negative fundamental factors to weigh on metal: Analysts

Zinc futures in London Metal Exchange (LME) hit a high of $2611.75/tonne on Thursday following drop in dollar as market priced in the likely victory of Joe Biden. However, there doesn’t appear to be much steam left in zinc futures. With mines back in full action and surplus supply in Asia, prices may have limited upside from here, say experts tracking fundamentals in the metals market. On LME, zinc futures have risen 48 per cent from the pre-Covid low of $1,763 a tonne to $2,611 a tonne.

In its latest release, the International Lead and Zinc Story Group (ILZSG) suggested that there will be 1 million tonne of surplus in zinc in 2020 and 2021 put together (620,000 tonnes in 2020 and 463,000 tonnes in 2021). While demand for the current year is expected to fall by 5.3 per cent, it will recover by 4.2 per cent next year, it added.

Demand outlook for zinc in world ex-China is not strong, say analysts. France, Germany and England have imposed new lockdowns. While one can be hopeful of a second round of stimulus from European Central Bank (ECB), it is not clear how far it can stoke demand for construction materials and metals, they added. In the US, a win for Joe Biden will weaken dollar and help metals through a large stimulus package. However, if Biden administration announces lockdown, then demand for metals may suffer.

China, on the other hand, continues to be a positive story. Recent data showed that industrial profits in China rose in October while Manufacturing and Services PMI continued to expand. But the catch is that the dragon country’s supplies are rising at a pace faster than expected by ILZSG, say experts. Sandeep Daga, Director, Regsus Consulting said, “In September, 2020, China’s output of refined zinc rose by 5.6 per cent over the previous month, speeding from 2.7 per cent m-o-m rise in August and 0.8 per cent in July. With attractive prices, supply growth could stay positive; this could possibly beat demand by early 2021…”

 

Indian demand up

Despite being one of the largest consumers of zinc, India derives prices from LME trade.

Domestic market zinc prices have kept pace with the rise in international markets this year. While initially hit by Covid-19, demand has recovered in recent months. Navin Jhunjhunwala, a zinc trader from Kolkata, said the demand for the metal has been rising steadily in the past four months and has touched the pre-Covid levels driven by robust orders from the railways, infrastructure companies and steel manufacturing companies for producing galvanised products.

Analysts believe that current high prices in zinc may not sustain. Priyanka Jhaveri, base metals analyst, Kotak Securities, said, “There are a lot of negative factors that are set to weigh on zinc prices in coming sessions. First, the worsening virus situation globally and then the higher stocks at LME warehouses. Zinc stocks at LME have been surging higher after hitting two decade low of 49,625 tonnes in February. Stocks have jumped over 350 per cent from the multi-year low to hit September, 2018 high of 2,26,400 tonnes in August and at 2,18,225 tonnes as of November 4 are up 1,67,000 tonnes or 326 per cent higher year to date…”

Published on November 05, 2020

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