Supply constraints add zing to zinc

Closure of older mines and increasing demand will likely keep prices higher



The zinc market faces a supply deficit after six continuous years of surplus.

Last calendar year ended with a 60,000-tonne deficit compared with a surplus of 2,36,000 tonnes in 2012 and 3,74,000 tonnes in 2011, data from the International Lead and Zinc Study Group (ILZSG) show.

A drop in inventories following closure of zinc mines even as demand continued to rise has led to deficit in the market.

Demand-Supply imbalance:

Globally, zinc consumption rose 7.4 per cent in 2013 compared with a 3.3 per cent drop in 2012. This was helped by increased demand for the metal in China, the US and Japan. Consumption in China, the world’s largest consumer of zinc, rose 13.7 per cent in 2013 after a 4 per cent decline in 2012. Similarly, consumption in the US and Japan increased 4.7 per cent and 5 per cent, respectively, following a 2.6 per cent and 4.4 per cent decline in the year earlier.

According to ILZSG, zinc consumption in India rose 12.3 per cent. But, even as demand is growing robustly, supply is getting tighter. Many major global mines such as Australia’s Century Zinc are reported to have almost exhausted their resources and are slated for closure by 2015 and 2016. The output from new mines is not expected to fill the gap.

The supply threat could keep zinc prices higher in the coming months. Though the recent weak economic data from China has dragged zinc price sharply lower, with outlook for 2014 on China continuing to be positive, there is a case for further increase in demand for zinc.

Outlook

Long-term view: MCX-zinc futures (₹121.5) contract is in a long-term uptrend. But there is little room left for the contract to rise within this uptrend. The contract is nearing a crucial resistance level of ₹140. Inability to break this resistance could turn the outlook bearish.

A reversal from ₹140 will have the potential to drag the contract lower to ₹115 and even ₹110 in the coming months.

On the other hand, a break above ₹140 will increase the bullish momentum. It will open the doors for the next targets of ₹160 and ₹170.

Medium-term view: The MCX-zinc futures contract has been trading sideways between ₹115 and ₹134 in the medium-term time frame.

Within this range, the contract is moving lower now after testing the range resistance at ₹134 last week. This leaves a high probability for the price fall further towards ₹115, the lower end of the range.

A breakout on either side of ₹115-134 will decide the ensuing trend. Intermediate support is at ₹120. If this support holds, it will keep alive the chances of a rise to ₹134 once again immediately and will increase the probability of a breach of ₹134.

Such a break can take the price higher to ₹137 thereafter. On the other hand, a break below ₹120 will take the contract towards ₹115. A break below ₹115 will turn the outlook bearish and will result in a subsequent fall to ₹110.

Short-term view: The short-term trend for the MCX-zinc futures contract is down. However, there is immediate support at ₹119.8, the 200-day moving average. If this support holds, the downtrend can reverse and the contract can move higher to ₹125 and ₹128 in the short-term.

On the other hand, declines below the 200-day moving average will keep the current downtrend intact and take the contract lower to ₹115.

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