Commodity Call: Zinc runs out of steam

Reversal from a key long-term resistance has increased the likelihood of a fall

Zinc prices have been under pressure over the last two weeks. The spot price of the metal on the London Metal Exchange has come off 7 per cent in two weeks. However, zinc is still the outperformer among others in the metals basket with about 40 per cent rise so far this year. Prior to the fall in the past two weeks, zinc prices had skyrocketed 63 per cent from a multi-year low of $1,451 per tonne in January to record a high of $2,364 early this month. Tighter supply due to the series of production cuts and mine closures announced last year had triggered this rally.

On the domestic front, the zinc futures contract traded on the Multi Commodity Exchange (MCX) touched a low of ₹96.65 per kg in January and surged to a high of ₹157.85 per kg this month. However, prices have come off from this high over the past two weeks. The MCX contract, which moves in tandem with the LME spot prices, is down 5.8 per cent over the last two weeks.

Demand-supply scenario

Nothing much has changed on the fundamentals of the metal to trigger the fall. Data from the International Lead and Zinc Study Group (ILZSG) showed that the market for zinc had run into a deficit of 1,38,000 tonnes in the first half of the year compared to a surplus of 1,94,000 tonnes over the same period last year. The ILZSG in April had revised higher the total zinc deficit for 2016 to 3,50,000 tonnes from its earlier forecast of 1,52,000 tonnes made in October 2015. This to some extent helped the metal to rally, up until recently. Any fresh revision in the deficit numbers in the next forecast to be released in October could impact zinc prices accordingly.

Technically, on the charts, the reversal over the last two weeks is very significant. This pull-back move has happened from a very important long-term trend line resistance level. This signals that the nine-month-long upmove in metal prices might have come to an end and there is a strong possibility of seeing a corrective fall, in the coming weeks.

Technical outlook

The near-term view has turned bearish for the LME spot zinc prices which is currently at $2,200 per tonne. Immediate supports are at the current level of $2,200 and at $2,170. A strong break below $2,170 can drag it in the short term to $2,015 — the 38.2 per cent Fibonacci retracement support or $2,000, the psychological support. Such a fall will confirm the trend reversal of the strong nine-month-old uptrend. Further break below $2,000 may even target $1,950 thereafter.

On the other hand, if the prices manage to hold above $2,000 and reverse higher, then a range-bound move between $2,000 and $2,370 can be seen for some time. A breakout on either side of $2,000 or $2,370 will then decide the next direction of move for the metal.

On the domestic front, the short-term outlook for the MCX futures contract is bearish. It is currently trading at ₹148. The sharp fall in the past week has dragged it well below the 21-day moving average support at ₹154.

This moving average was limiting the downside for the contract consistently for a prolonged time since June. It will now act as a good resistance for the contract. So, as long as it trades below ₹154, a fall to ₹145 or ₹140 looks likely in the short term.

What happens around the level of ₹140 will then decide the next leg of move. A strong reversal may take the contract higher to ₹150 and ₹155 once again. But a strong break below ₹140 will increase the downside pressure and drag it to ₹134 — the 38.2 per cent Fibonacci retracement level. Further break below this support may increase the likelihood of the contract tumbling to ₹128 — the 200-day moving average support thereafter.

The region between ₹158 and ₹159 will be a key resistance. A fresh rally is possible only on a strong break above ₹159 which looks less likely in the near term.

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