The zing in your portfolio

SMARTSHARE

Whether you have zinc stock in your portfolio or not, nature has endowed us with traces of this metal in our body. Our cells require zinc to multiply. Besides it also helps us in smelling, tasting and regulating the body's immune system.

Biology apart, zinc is a commodity that has done pretty well this year and is likely to be an out-performer in the next year as well. While aluminium is up 18 per cent for the year, gold is up 23 per cent, silver 36 per cent, copper 58 per cent and zinc a solid 128 per cent.

Zinc is the fourth most common metal and the 23rd most abundantly available element in the earth's crust. Around 50 per cent of all zinc produced is used to galvanize steel to protect from rust and corrosion. It is also an alloying element with copper to form brass. American pennies are nothing but 98 per cent zinc.

Zinc oxide is used as white pigment in water-colour and paint, a vulcanising activator in rubber and ointment in sunburn and windburn. Zinc chloride is used as deodorant and zinc sulphide is the material that makes the hands of clocks glow in the dark.

The world demand for zinc over the next 10 years is expected to grow at 5 per cent while world supplies are expected to grow at a mere 1.5 per cent. Higher demand growth is expected to keep zinc supplies tight and prices firm.

In the foreseeable 2007, the world is going to consume more zinc than it can produce, as it has been doing since 2004. The world has gradually eaten into its tradeable inventory with the London Metal Exchange (LME).

The current stocks of 66,000 tonnes are at a 15-year low and represent just 2.2 days of total world consumption. Users of zinc dip into this tradeable inventory only to meet their shortfall, which is 1,000 tonnes a day.

Going by the current depletion rate, one would expect the inventory to dry up in 66 days. So sometime in January 2007, the world will be scraping the bottom of this inventory pot like the proverbial Draupadi, when sage Durvasa came on an unannounced lunch to the exiled Pandavas accompanied by his 10,000 pot-bellied disciples.

While Lord Krishna was there to save Draupadi from the possible curse of the hot-tempered sage, modern-day zinc consumers could be left at the mercy of Shylocks, who are likely to play pricey when this happens.

Zinc, which is currently quoting at a price of $4,335 a tonne, could see its earlier high of $4,580 being taken out. Unless the mines do something about increasing production, prices could rise.

Technically, there is double top formation at $4,580, which is a tough nut to crack. But as and when that happens, one could see the prices galloping to $5,000-plus levels.

Equity investors could consider making Hindustan Zinc as a part of their portfolio with a 6-9 months view, as it is best placed among the Indian metal stocks to ride this boom.

For every $100 rise in zinc prices, the EPS for the company can rise by Rs 10. Investors, however, must remember that apart from reflecting the movements in the price of the commodity, the stock would also be susceptible to any major change in stock market sentiment.

Disclosure: The stock has been recommended by financial advisory Anagram in the past at lower levels.