Commodity Call. Why zinc is sinking

While other industrial metals are looking up, zinc prices continue to be under pressure. The zinc futures contract traded on the Multi Commodity Exchange (MCX) has tumbled 11 per cent in the last two weeks. This has marked the resumption of the strong downtrend that has been in place since May. The contract had surged over 9 per cent in the first four months this year.

Zinc spot prices on the London Metal Exchange (LME) topped out at $2,420 per tonne in May and have tumbled 33 per cent to $1,616. The slowdown in China, the world’s largest consumer of zinc, has been the major factor that has dragged the zinc prices lower. Recent data showing China’s refined zinc imports falling to 33,728 tonnes, down 42 per cent lower than last year, has put renewed pressure on the metal in the last couple of weeks.

Another factor which has contributed to this fall is the surge in inventories. Data from Bloomberg shows that inventory in warehouses in New Orleans has surged over 51 per cent to 4,72,450 tonnes since July. New Orleans holds about 79 per cent of the total LME stock.

Weak demand and bulging inventories could continue to keep the zinc prices under pressure in the coming weeks as well.

The level of $1,750 provided a floor for spot prices since 2011. The sharp fall below this level last month is technically a big negative.

The bounce-back move from the low of $1,687 has failed to breach $1,800. Prices turning lower again from the high of $1,821 suggest lack of buying interest in the market.

Given this trend, an immediate fall to $1,570 is likely. A further break below it can drag the spot zinc price to $1,500. On the charts, the next strong support is at $1,400. There is a risk of prices tumbling to test this level as long as they stay below $1,800. Only a strong break and a decisive weekly close above $1,800 will ease the downside pressure on zinc. This could open the doors for a rally to $2,000. But such strong rise looks unlikely at the moment.

The outlook for the MCX-Zinc futures contract, which moves in tandem with the LME spot price, is also bearish.

The contract has declined below its key medium-term support at ₹118 and ₹116, the 200-week moving average and trendline support levels, respectively. It is currently poised at ₹107.

The psychological level of ₹100 is a significant level to watch now. A strong break below this level can take the contract lower to ₹95 and ₹92 in the medium-term.

Key medium-term resistance is at ₹120. A strong break above this level will turn the outlook positive for the contract. Such a break can take it higher to targets of ₹125 and ₹120 thereafter.

The bounce back move from the August low of ₹110.6 has proved short-lived. The contract faced strong resistance at ₹122. Inability to break above this hurdle and the subsequent sharp fall turns the short-term outlook bearish. Important resistance levels are at ₹113 and ₹115 which can cap the upside for the contract. The contract will need a strong break above ₹115 to rise to ₹118 and ₹120.

But as long as it trades below the resistance levels mentioned above, a fall to ₹100 looks likely in the short-term. But a corrective move from ₹100 to ₹105 and ₹110 cannot be ruled out.

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