After touching an 11-year high of $3,595.50 per tonne in February, zinc prices at LME fell to a two-year low of $2,283 per tonne in mid-August, suffering a 33 per cent fall within the first half of this year. At the MCX futures platform, the prices fell from 232.70 per kg to 163.80 per kg in six months of the current year.
Zinc prices rose in the beginning of year due to tightened market supply conditions, where lower inventory levels at LME & SHFE-tracked warehouses helped prices climb higher. After prices peaked, the markets turned its focus on new upcoming mining projects which picked pace over higher metal prices. Since then, market perspectives are closely monitoring the demand side fundamentals which forced the prices to the red zone due to weaker demand. The slowdown in the Chinese construction sector, which uses zinc galvanised steel, also contributed to the fall in the prices even before the US initiated the trade war with other countries. The trade war fears and imposition of import duties on steel by the US rattled the global economies, adding a bearish pinch to the global metals segment.
As a result of the concerns due to the trade war, zinc prices are in divergence with the fundamentals. Looking over the production patterns, Chinese refined zinc production in July was down 3.5 per cent year-on-year at 439,000 tonnes, the lowest national run rate since August 2013. Although the outlook for steel sector remains apprehended, as per the monthly figures from the National Bureau of Statistics, the trend of production is declining on a month-on-month basis.
Chinese authorities, however, vowed to take fiscal policies, including cutting taxes, to stabilise the economy. Currently, Chinese smelter’s margins have fallen and lower treatment fees are indirectly suggesting a shortage of raw material.
Though zinc prices have collapsed beyond fundamentals and entered the oversold zone, the technical setup for recovery and support from the strengthening fundamentals outlook will definitely act as a signal for traders to build up long position in the near-term future.
The author is a Fundamental Analyst with Karvy Comtrade