Demystifying a commodity: Zinc

Zinc, which is used to galvanise iron and steel to prevent rusting, is one of the most widely traded base metals. China is the world’s top producer. Australia, Canada and India are the other major producers. About 55 per cent of the world’s total zinc is used in the steel industry and it finds major use in the infrastructure and automobile industry. In addition to the restricted supply due to mine closures, increased spending in China’s infrastructure sector was also one of the major reasons for zinc prices surging last year. Just like the case of other metals, in zinc too, China is the leading consumer.

China accounts for about 50 per cent of the global demand for zinc. As such, keeping an eye on China’s demand and infrastructure spending helps in determining the price trend in zinc.

MCX-Zinc futures contract

Zinc is the most traded metal in the Multi Commodity Exchange (MCX). It is traded on the MCX under two categories, Zinc and Zinc Mini. It is traded from Monday to Friday, from 10 am to 11:30 or 11:55 pm, depending on the daylight savings time period in the US.

The lot size of the Zinc contract is 5 tonnes and the Zinc Mini contract is one tonne. Both contracts trade on price of one kg zinc.

Currently the contracts are trading around ₹194 per kg. So, one lot of the Zinc (5 tonne) contract will cost you ₹9,70,000 and a lot of Zinc Mini (one tonne) contract will cost ₹1,94,000. However, it does not mean that an individual intending to trade in the Zinc contract must have this huge amount as a capital. A portion of this total money, which is termed as the “margin” is enough to trade these contracts.

In general, the margin amount will be 5 per cent of the total cost of the contract. That is, a trader will need ₹48,500 (5 per cent of ₹9,70,000) and ₹9,700 (5 per cent of ₹1,94,000) to buy one lot of the respective contract on the MCX. If volatility is high in the market, one should shed more margin amount.

The delivery logic of this contract comes under “both option” category. That is, physical delivery happens only if the intention of both the buyer and seller to give and take matches. Else, the contract is cash settled.

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