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Informist, Wednesday, Aug 28, 2024

 

By Sandeep Sinha and Sayantan Sarkar

MUMBAI/NEW DELHI – Though zinc prices on global and domestic exchanges have risen for three successive weeks, the bulls are not done with the base metal yet. Shrinking global inventories and production cuts by China's smelters are likely to keep zinc prices on the boil, analysts said. 

 

The positive sentiment is supported by continuing supply tightness and persistent weakness in the dollar index amid the increased likelihood of an interest rate cut by the US Federal Reserve in September, they said.

 

The global zinc surplus fell below 10,000 tn in June from 44,000 tn in May, according to data from the International Lead and Zinc Study Group. The metal surplus narrowed to 228,000 tn in the first six months of 2024 as compared with a surplus of 452,000 tn in the same period last year, which also aided the positive sentiment.

 

Moreover, Chinese smelters will cut zinc ore demand by about 1 mln tn on a metal contained basis compared to forecasts made at the beginning of the year, Marex Spectron, a UK-based financial services company, reported. At an industry event organised by state-owned Beijing Antaike in Inner Mongolia on Aug 21, 14 processors having a combined smelting capacity of 4.17 mln tn, accounting for 70% of Chinese supply, agreed to reduce production, turn to scrap feed, and delay expansion as they battled a decline in treatment charges.

 

Spot treatment charges on imported ore have recently dropped below zero amid tight supplies of concentrate globally and subdued demand, ING Economics said in a note. Treatment charge is the fee a miner pays to smelters for converting zinc concentrate into refined products.

 

Spot treatment charges on imported zinc concentrate have fallen below zero over the past month. The annual benchmark was set at its lowest since 2021 earlier this year, as competition has increased among smelters to process mined ores, according to a Bloomberg report. 

 

So far in the current calendar year, zinc has risen 16.9% or 38.5 rupees per kg on the Multi Commodity Exchange of India, and 9.6% or $237 per tn on the London Metal Exchange. So far in August, the metal has gained 6.3% or 16 rupees a kg on the MCX and 8.9% or $237 a tn on the LME. At the time of writing, the September zinc contract on MCX was 267.7 rupees per kg, while the three-month contract on LME was $2,876 per tn.

 

"Zinc prices are currently trading above $2,900 per tn on the LME and 266 rupees/kg on the MCX, driven by anticipated reductions in production as major Chinese zinc smelters are cutting their concentrate intake to manage refining losses. Already, Chinese zinc output dropped to a one-year low of 536,000 tn in July, down from December's peak of 661,000 tn," Kaynat Chainwala, associate vice-president, commodity research, Kotak Securities, said.

 

In addition, the dollar index, which measures the strength of the greenback against a basket of six major currencies, fell to a fresh two-month low of 100.51 on Tuesday after US Fed Chair Jerome Powell hinted at a rate cut in September. "The time has come for policy to adjust," Powell said in his keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming, last week. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," Powell said.

 

"The short-term trend is bullish, and we anticipate that technical indicators for the zinc September contract will turn more favourable, potentially driving prices upward," Tejas Shigrekar, senior technical analyst at Angel One, said.

 

Chainwala said the MCX September zinc contract has key resistance at 281 rupees per kg, and a break above will push the contract higher towards the 300-rupees-per-kg level, while placing a stop-loss at 252 rupees and 242 rupees. On the LME, she said zinc prices may face resistance at $3,022-$3,185 a tn.

 

Shigrekar expects the MCX September zinc contract to reach 271 rupees per kg. A break above will push the contract higher towards the 277-rupees-per-kg level, with a stop-loss at 259 rupees and 253.50 rupees, he said. On the LME, he said zinc prices may face resistance at $2,930-$2,990 a tn.

 

Demand for zinc comes predominantly from the steel, die-casting alloy, and brass industries. Steel accounts for 60% of the demand as zinc is used in the galvanisation of steel. The die-casting alloys business accounts for 13% of the demand for zinc, and brass for 11%. However, weak industrial and construction demand is forcing Chinese mills to reduce steel production, which in turn hurts demand for zinc, Chainwala added.

 

"While global consumption (of zinc) rose by 3.4% in the first half of the year, production fell by 0.1% over the same period," Volkmar Baur, forex analyst at Commerzbank AG, said in a report. However, Baur believes that any upside potential for zinc prices will depend on the economic situation in China as the country's construction sector is estimated to account for around 50% of global zinc demand.  End

 

US$1 = 83.95 rupees

 

Edited by Rajeev Pai

 

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