Chinese demand prospects likely to brighten zinc

By Kaynat Chainwala

Zinc, the silvery white metal used mainly in galvanization of Steel and Iron, gave an excellent performance in 2016 with around 60 percent gains both on the LME and MCX. Unfortunately, the year 2017 has not proved as lucky for Zinc yet.

LME Zinc has slipped to fourth position with gains of mere 1.5 percent while MCX Zinc prices declined by 2 percent so far this year. Steel galvanization being the most important demand driver for Zinc, falling demand of Steel in China is pinching the non-ferrous metal. The mainland nation pledged output cuts in early 2016 to cut 150 million tonnes of excess capacity by 2020 in a crackdown on polluting industries. To achieve the same, China has cut 65 million tonnes in 2016 and has already slashed 31.7 million tonnes so far in 2017, 63 percent of target of 50 million tonnes.



Despite this, Chinese steel output, which accounts for half of global steel production, rose 4.6 per cent in the first quarter of 2017 to 201.1 million tonnes, after a 1.2 per cent increase to 808.4 million tonnes last year.

On the other hand, aggressive measures taken by the Peoples' Bank of China to cool the overheated property market has hurt the ferrous metal demand, in turn pushing Zinc prices lower from an average $2782/t in Dec'16 to $2682/t so far in May'17.

This can be seen in the Chinese Refined Zinc import figures, which have plunged 68 percent from 180,985 tonnes in the first quarter of 2016 to 57,986 tonnes in the corresponding period of 2017.



Latest data from the National Bureau of Statistics (NBS) showed China's refined zinc output fell to 41,300 tonnes in April'17 from 43,400 tonnes in Mar'17. Production of refined metal has declined sharply of late as fall in concentrate supplies following the closure of Australia's giant Century mine and Ireland's Lisheen mine in 2016 has started impacting the Chinese market.

This indicates that the zinc market may witness turnaround pretty soon given that the mainland nation could move towards refined metal imports amidst dwindling concentrate supplies.

Talking about inventories, Shanghai Zinc stocks as on 20th May'17 stand at 91,749 tonnes, the lowest since January 2015 and down by 41 percent since 23rd, April'17, indicating that the shortage of concentrates is pushing traders towards exchange stocks. LME story is no different either as Zinc stocks there have plunged by around 20 percent this year.

Besides, the International Lead and Zinc Study Group anticipated in its latest annual forecast that global demand for refined zinc metal will exceed supply by 226,000 tonnes in 2017. As per the group, the market is likely to be buoyed by a further 2.6 percent demand increase to 14.30 million tonnes in 2017 after a 3.1 percent surge in 2016.



Taking all the factors into consideration, one can safely assume that Zinc's performance in the coming months would be better given the tightening prospects of the refined market and stock drawdown at both LME and Shanghai warehouses. So, we expect Zinc prices to gain momentum towards Rs.180-185/kg mark in the near term. (CMP: Rs.169.15/kg)

(Kaynat Chainwala is Research Analyst- Base Metals at Angel Broking. Views expressed in this column are her own and do not represent those of ETMarkets.com. Investors should consult their financial advisers before taking any investment calls based on this article)