Zinc prices have risen sharply in the last few months. Since March, spot prices of the metal on the LME have rallied 21 per cent. The metal now trades at $2,392 a tonne The market for zinc had run into deficit in 2013 after being in surplus for six consecutive years. According to data from the International Lead and Zinc Study Group (ILZSG), there was a deficit of 91,000 tonnes in the metal in 2013. This deficit has already widened to 1,07,000 tonnes between January and April this year.

The domestic zinc futures contract, which moves in tandem with LME zinc, is also up about 21 per cent since March this year. The uptrend in MCX Zinc is likely to continue. Investors can consider buying the contract and holding it for gains in the medium term.

Supply constraints

The supply deficit was due to drawdown in mine production. Mine output, which increased 3.8 per cent in 2012, rose by just 0.5 per cent in 2013.

Canada’s two major mines, Brunswick and Perseverance, had shut their operations last year. Together they contributed nearly 3 per cent to the global mine production in 2012.

Supply constraints in the zinc market may remain for some more time to come. Australia’s Century mine, the world’s second largest zinc mine, is expected to close its operations by 2016. Although there have been reports of new mines coming up in the next one-two years, they may not make up for the loss of closed mines, say market experts.

However, while supply will be tight, various projections indicate that demand for zinc will only increase in the coming years. ILZSG forecasts refined zinc consumption to go up over 4 per cent to 13.58 million tonnes this year. With global zinc production (from mines) to increase by only 2.8 per cent to 13.57 million tonnes, a deficit of 1,17,000 tonnes is anticipated.

Lower production and increasing demand could aid further rise in zinc price in the coming months.

Outlook

For the medium term , the outlook is bullish for the MCX Zinc (₹144 a kg) futures contract. The price action from August 2013 to June 2014 shows formation of a triangle. The contract has witnessed a bullish breakout of this triangle pattern this month and also breached a key resistance at ₹139 last week.

Though currently it is in another resistance zone, the downside could be limited if a pullback is seen from this level. A rally to ₹160, the target level of the triangle pattern, looks likely in the medium term. Supports for the contract are at ₹139, ₹134 and ₹129.

Traders with a medium-term perspective can consider taking long positions in MCX Zinc futures contract. If the contract reverses lower from ₹145, accumulate more long positions near ₹139 and ₹135. The contract’s price chart says that the downside will be limited to ₹134. An immediate decline below this level looks less probable at the moment. Stop-loss can be kept at ₹128 for the target of ₹160.

The medium-term outlook will turn negative only if the contract records a strong close below ₹129.

The ensuing target on such a break will be ₹123 and ₹110 — the 55- and 200-week moving average support levels, respectively.

For the short term , the MCX Zinc futures contract has a significant resistance near the current levels at ₹145. Since the contract has risen sharply in a short span of time, there is a high probability for this resistance to trigger a short-term correction in the contract. A reversal from ₹145 can pull the contract lower to ₹139 initially and then to ₹137 — the 21-day moving average.

A further break below this level can drag the contract to ₹134 in the short term. On the other hand, if the contract manages to surpass this hurdle at ₹145, it can extend the current rally to ₹149. The next key short-term resistance for the contract is at ₹149.5 which is the 61.8 per cent Fibonacci retracement level.

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