At the beginning of 2015, zinc had the brightest fundamentals among base metals as the impending closure of two large mines — Century in Australia and Lisheen in Ireland — raised expectations of a deficit and insulated it from the sell-off in the base metals segment.

But, unfortunately the glory did not last long as the metal witnessed its worst performance, second only to nickel, in the following months till September.

The deficit hopes from the earlier part of 2015 eased following a build-up of zinc stocks at LME warehouses in New Orleans by nearly 175,000 tonnes in August-September, jumping almost 60 per cent over the previous month.

Zinc stats

This demonstrated that a substantial amount of zinc can be quickly dumped in the market, thereby increasing the likelihood of the zinc market moving to a surplus in 2016.

Confirming the same, the latest metals balance report by the World Bureau of Metal Statistics (WBMS) showed that the worldwide zinc market recorded a marginal surplus of 219,000 tonnes between January and July 2015 against a deficit in 2014.

Besides, Chinese production of locally refined zinc surged by nearly 11.5 per cent between January and July compared with the same year-earlier period.

The China factor

China is the world’s biggest consumer of zinc, with a 46 per cent share, and hence a fall in Chinese zinc imports to 231,900 tonnes up to July from 420,000 tonnes on a year-on-year basis indicated serious concerns. As a result, the world had a surplus of 219,000 tonnes at July-end from last year’s deficit of 142,000 tonnes, leading to a 23 per cent plunge in the galvanising metal from January-September.

However, the tides turned favourable in October after Switzerland-based mining and trading giant Glencore’s announcement that it will cut 500,000 tonnes of annual production, equivalent to around 4 per cent of global supply, in its latest response to weak commodities prices.

The cuts will reduce the company’s fourth-quarter production by 100,000 tonnes. Previously, the firm was expected to produce between 1.52 million tonnes and 1.57 million tonnes of zinc this year.

Last month, Glencore announced similar cuts to copper output, suspending two large mines in Africa and removing about 500,000 tonnes of annual supply from the global market.

According to the International Lead & Zinc Study Group, the global zinc market is expected to swing to a deficit of 152,000 tonnes in 2016 from a surplus of 88,000 tonnes this year, as reductions in mine supply outside China are likely to curb output.

The group added that the forecasts were prepared before Glencore’s announcement and don’t reflect the company’s cuts, hinting that the deficit could be much more than estimated.

Hence, we expect zinc prices to trend higher from a two-month perspective and LME Zinc (CMP: $1,803) prices can possibly head higher, towards $2,000 a tonne, while MCX Zinc (CMP: ₹117) prices may surge towards ₹130 a kg.

The writer is Associate Director – Commodities & Currencies, Angel Commodities Broking Pvt Ltd. The views are personal.

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