Zinc has risen 43 percent since the start of this year making it one of the best performing commodities. Zinc is the shining star among the base metals and in the previous article on zinc, we mentioned that zinc rally is there to stay and looking at fundamentals, we still think the rally will continue till year end. The determinant factor for rise in zinc prices are the closure of zinc mines in Australia and overseas. Goldman Sachs has forecast 114,000 tonne shortage of zinc this year, which will widen to 3,60,000 tonne in 2017. As the deficit widens, prices will ascend. Goldman expects zinc could hit $2,500 per metric tonne in six months.
Investors are bullish on zinc as its open interest climbs to highest since October 2015. Rising demand for galvanized steel in China as well as fiscal stimulus provided and support for infrastructure is boosting the price of zinc. Closures of several large mines since late last year have contributed to tightness in the physical market. Chinese trade data highlighted the shortages as China’s imports of refined zinc jumped 65 percent in June.
In 2011-2013, Zinc prices were languishing and so many mines were closed. Approximately 1.5 million tones of mine capacity may have been removed from the market because of the massive mine closure. Now very few mines have restarted and demand has picked up but the supply still remains the same contributing to the deficit in physical market. China’s domestic zinc production fell by 1% while its net import of refined zinc jumped more than double in 2016. Miners are now rushing to start the mines with soaring zinc prices but it takes minimum 8-10 months to start the mine so the deficit is still expected to remain till year end.
In MCX, Zinc is on the verge of touching its high it made during May 2015 of Rs. 154.35. Investors are recommended not to short Zinc in spite of this huge rally because this rally is backed by fundamental news. The rally is not speculative in nature. The rally may lose its steam once it touches Rs.155 as there is where some amount of resistance is expected. Any short position can be opened at that level with stoploss of Rs.160 and target of Rs. 140. Those investors who are long in Zinc can book profit around Rs. 154-155. Short term correction is expected but long term, Zinc is bullish and likely to remain till year end.
(The author is director at Tradebulls)