Commodity Call. Zinc on a strong footing

Zinc has outperformed other base metals with a strong 17 per cent rally so far this year. The metal’s spot price on the London Metal Exchange (LME) has now surged to $1,861 from $1,593 per tonne in December. On the domestic front, the zinc futures contract traded on the Multi Commodity Exchange (MCX) has risen 18 per cent this year.

A sharp drawdown in inventory levels has been a major trigger for this price rally. The warehouse stock in the LME has come down 23 per cent, from 0.504 million tonnes in February, to 0.387 million tonnes. Surging supply and sluggish demand were the major causes for zinc to slump 26 per cent last year.

Additionally, signs of a pick-up in Chinese demand are also supporting the base metal price, as evident from the fall in China’s stock levels. The inventory in Shanghai Futures Exchange has come down 8 per cent to 0.252 million tonnes as of May 12 from 0.274 million tonnes in March.

The impact of a series of production cuts and mine closures announced last year by major producers is reflecting in the depletion of zinc inventories now. Glencore, a major producer, closed two of its mines and announced a production cut of five lakh tonnes, which is about 4 per cent of the total global supply.

The demand-supply balance this year favours higher prices. In April, the International Lead and Zinc Study Group (ILZSG) revised upwards its deficit forecast for 2016 from its earlier forecast of October last year. It expects demand for refined zinc in 2016 to increase 3.5 per cent from the pervious year to 14.33 million tonnes. A surge in demand from China’s infrastructure sector is expected to increase demand for zinc by 4.5 per cent this year. China is the world’s largest consumer of zinc.

On the supply side, a 1.4 per cent fall in mine production to 13.27 million tonnes is forecast following the mine closures last year. Refined zinc production is expected to increase by a tiny 0.5 per cent to 13.98 million tonnes. This will leave the refined zinc metal with a deficit of around 3,50,000 tonnes in 2016 — higher than the 1,52,000 tonnes deficit forecast by the ILZSG in October. The deficit could keep the downside limited for zinc and support further rise in prices, going forward.

On the charts, the worst seems to be over for this metal. The LME spot zinc price made a high of $2,420 in May 2015 and plummeted to a low of $1,451 in January 2016. Thereafter, the metal price reversed sharply higher to record a high of $1,942. This reversal is very significant as it happened from a very important long-term trend line support level. Key resistance is in the $1,950 to $2,000 zone, which is restricting the upside at the moment. Below this resistance zone, a corrective fall to test $1,800 cannot be ruled out. There is strong support between $1,800 and $1,770. An immediate break below $1,770 looks less probable. A reversal from this support zone can take the price higher to $1,950 and $2,000 once again. A strong break above $2,000 would boost the bullish momentum and take it to $2,200 initially. It will also increase the possibility of the metal price testing $2,400 and $2,500 in the long term.

On the other hand, if the price declines below the support at $1,770, it will turn the outlook bearish and drag zinc lower to $1,600 over the medium term.

On the domestic front, the MCX Zinc contract made a low of ₹96.65 in January and has surged 30 per cent from there. The contract has very strong support between ₹120 and ₹118 — the zone bounded by the 200- and 21-week moving averages, respectively. The 38.2 per cent Fibonacci retracement support is also poised in this region. This makes the ₹120-118 zone a very strong support, which may limit the downside in the contract. Declines to this support zone may attract fresh buying interest in the market.

Currently, the contract is oscillating around the 50 per cent Fibonacci retracement resistance at around ₹125. A bullish breakout of this consolidation phase above ₹130 can immediately take the contract higher to ₹132. Further break above ₹132 may test the next target of ₹135 in the short term.

A strong break above ₹135 will open doors for the MCX zinc futures contract to rise to ₹140 or even ₹145 over the medium term. The outlook for the contract will turn negative only on a strong fall below ₹118.

Such a break will increase the danger of it falling to ₹110 and ₹107 thereafter.

COMMENT NOW