Market Strategy

Excess supply to keep zinc price ranged

Gurumurthy K. | Updated on November 16, 2013 Published on November 16, 2013




Zinc, the fourth most used metal, finds major use in the process of galvanising. Construction, transport and consumer goods are the major industries where zinc is used.

DEMAND, SUPPLY TO PICK UP

Global zinc production and consumption fell nearly 4 per cent and 2 per cent in 2012 respectively. However, the International Lead and Zinc Study Group (ILZSG) forecasts demand and supply to increase this year and next. The ILZSG projects demand to increase by 4.8 per cent and 5 per cent in 2013 and 2014 respectively. On the supply side, 1.7 per cent and 2 per cent is the increase it forecasts for 2013 and 2014 respectively.

Global zinc spot price has been moving in a broad range of $1,590 to $2,635 an ounce since 2010. This range has narrowed down to $1,750 to $2,200 an ounce in the last two years. Since 2008, the overall supply of zinc has always exceeded demand which has kept the price in a tight range. ILZSG forecasts this oversupply situation to continue in 2013 and 2014 as well. It expects supply to exceed demand by 1.20 lakh tonnes and 1.15 lakh tonnes in 2013 and 2014 respectively. As such, zinc price can continue to move sideways at least until 2014. However, Barclays, a global financial service provider, expects the zinc market to run into deficit in 2015 on weakening supplies from the mines.

TECHNICAL OUTLOOK

In this week’s dissector we see the outlook of the zinc futures contract traded on the Multi Commodity Exchange. The MCX futures contract closed at Rs 117.7, down 1.8 per cent for the week.

Long-term view: The long-term view is bullish for the MCX zinc contract. It has strong trend support near Rs 102 and below that the psychological support at Rs 100. These levels are likely to support prices in the long-term. Intermediate fall to these supports will be a good opportunity to enter long positions. A rise from the Rs 102-100 support zone can result in a rally to Rs 140 or even Rs 150. On the other hand, if the contract falls below Rs 100, then the decline can extend to Rs 96.

Medium-term view: The MCX zinc contract spiked to a high of Rs 136.9 and has come off sharply from there.

Significant resistance is at Rs 125.2.

The medium-term outlook would be bearish while the contract trades below this resistance.

The price can decline to Rs 110-108 over this time period.

The contract will need to rise strongly above Rs 125.2 to turn the outlook positive and take the price higher towards Rs 130.

Short-term view: The sharp fall from the August high of Rs 136.9 has taken support in Rs 116-115 region. However, the corrective rally from this support zone is finding resistance near Rs 120 now. A strong rise above this resistance is needed for the contract to rise higher towards Rs 125. Failure to breach the hurdle at Rs 120 can take the price lower to Rs 115 and can keep the price in a sideways range between Rs 115 and Rs 120 for some time.

> gurumurthy.k@thehindu.co.in

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