Zinc prices, which declined in the first three months of 2020, now seem to be on the path of recovery as the coronavirus pandemic has led to suspension of mining operations in most of the top zinc-producing countries, resulting in supply distortion.

This ended in the three-month price of zinc moving upwards of $2,200 per tonne recently on the London Metal Exchange (LME) where it was being quoted at around $1,800 a tonne in early April. However, it should be noted that the price has been falling since early 2018, from over $3,500 a tonne.

In India, the futures price on the Multi Commodity Exchange (MCX) rose from ₹135 a kg to over ₹170 a kg over the past four months. Since the futures price in MCX is linked to the LME price, the global supply-demand dynamics that effect the price in LME will, in turn, influence the price in MCX as well.

Production rises

Mining output dropped by nearly 6 per cent in January-May 2020 compared with the same period last year. This was because of suspension of mining activities in top zinc concentrate-producing countries such as Peru, Bolivia and Mexico in response to the spread of the coronavirus.

According to the International Lead and Zinc Study Group (ILZSG), the temporary shutdown of mines in these countries had potentially led to an output loss of about 470 kilo tonnes (kt); the estimated overall loss globally is 635kt for 2020.

Comparing this with the 2019 global mining output of 3,890kt, the loss would account to 16 per cent.

This supply distortion pushed the price of the metal upwards by nearly 22 per cent within a span of just four months.

In India, China and Australia, mining operations were largely unaffected or was suspended only for a short period since mining was classified as an essential activity.

Interestingly, despite scaled-down mining operations, the total refined zinc output from the smelters went up by 2.5 per cent during the first five months of this year as industrial activities normalised in China — the largest refiner, contributing about 45 per cent of the global output.

During January-May 2020, there was a drop in consumption of nearly 5 per cent as against the same period in 2019.

This, along with an increase in refined zinc output, led to a surplus.

Usage-wise, half of the zinc is used for galvanising, especially in the automobile sector where zinc coating is used for corrosion resistance. As automobile sales across the globe nosedived, the demand was hit substantially.

China and Europe, which together consume about 65 per cent of the total refined zinc, saw a contraction of 22.5 per cent in auto sales, denting the demand for zinc. But there has been an uptick in May and June in both the regions.

There is, however, hope signalled in high frequency macroeconomic data. While the industrial production grew by 4.4 per cent in China, the euro area saw it expand by 12.4 per cent in May. Moreover, the manufacturing PMI (Purchasing Managers’ Index) indicates an expansion in the manufacturing activities in China and Europe.

Outlook

More than any other factor, the supply-demand equation will mainly impact the price of a commodity. Going ahead, though the mining operations might improve, the increasing number of new Covid-19 cases in Peru, Bolivia and Mexico will slow the ramp-up in mining operations.

Given the above factors, even if the demand remains flat, the price of the metal is likely to stay at the current levels.

So, for now, the three-month price of zinc on LME might stabilise between $2,100 and $2,300 per tonne. But if there are any green shoots visible over the course of coming months, the price can appreciate to $2,400 per tonne by the end of the year.

Since the price in India is closely linked to the international price, domestically, the price can remain within ₹165-180 a kg. If the price appreciates in the international market, the domestic price can move towards ₹190 a kg.

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