Commodity Analysis

2019 hasn’t come bearing gifts for zinc

G Chandrashekhar | Updated on February 17, 2019 Published on February 17, 2019

The outlook is clouded by economic growth uncertainties and trade friction

The year of 2018 was tumultuous for zinc. The market saw wild swings. Prices rose to a high of $3,600 a tonne and then fell to a low of $2300/t at one point. Clearly, trade friction between two of the world’s largest economies — the US and China — distorted the market and fuelled negative sentiments.

This year is not going to be significantly different. The key themes will be macroeconomic concerns, continuing trade friction and, of course, the role of speculative capital in this choppy scenario. If anything, growth concerns are most likely to override even demand-supply fundamentals.

For three years in a row from 2016 to 2018, the zinc market was in deficit. In 2019, too, the market will continue to be in deficit, but at a markedly moderate level of about 70,000 tonnes. This is because supplies are set to grow. New mines are being opened, as a result of which concentrate availability is set to improve this year. If anything, there will be a substantial surplus which will help replenish the previously depleted stock of concentrate.

A critical issue for the metal is smelter performance. In China, in particular, environmental concerns are seen exerting a negative impact not only on production but also on prices. Chinese smelters have come under increasing scrutiny from environmental agencies. Many were forced to either close down or cut back on production last year to comply with environmental restrictions on solid, gaseous and waste-water emissions. No wonder, Chinese smelter production fell to multi-year lows. A sharp fall in zinc prices exacerbated the situation.

Demand ahead

At the same time, refined zinc production is set to rise in China and India this year. Several initiatives of the Indian government are likely to spur demand for the base metal. In particular, huge investments in the infrastructure sector including railways modernisation, highways and smart cities will drive consumption demand via the use of galvanised (zinc-coated) steel. An additional demand push will come from the automobiles industry, consumer durables and the housing sector.

As the mover and shaker of the base metals market, China’s moves are being closely watched. While manufacturing activity in the Asian major is slowing, property market has turned sluggish. This is seen impacting demand. In 2019 as a whole, world zinc demand is set to rise only moderately.

So, the outlook for the world zinc market for the current year is clouded by economic growth uncertainties and trade friction. The ongoing trade talks between the US and China are being closely monitored, but it is widely expected that there will be no tangible result.

Given this, the market fundamentals and changes, if any, will need to be watched closely. The fact that the market will continue to be in deficit, however moderate, will surely exert an upward thrust on prices.

In this scenario, one known unknown is the stimulus package that China is likely to announce. Although the size of the package is still unclear, when announced, the package is bound to attract attention . It is at this time that speculative capital may step in, which in turn will exert an exaggerated impact on prices.

So, in an increasingly tightening market, the direction of zinc market will be substantially determined by the success or otherwise of trade talks.

If trade tensions ease, it will boost investor sentiment and propel prices higher, perhaps to the levels seen in 2018. On the flip side, if the trade war escalates, investor sentiment towards riskier assets will be dampened and prices will languish.

In the first half of this year, zinc is likely to trade broadly between $2350/t and $2550/t .

Interestingly, the lead market is likely to take a cue from the zinc market. For lead, key price drivers are absent at the moment. So, the two metals are likely to move in tandem.

The writer is a policy commentator and a commodities market specialist

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