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Zinc, primarily used for rust-proofing steel, has emerged as the most attractive of the six principal industrial metals traded on the London Metal Exchange (LME.) At a three-month price of $2,375 a tonne, zinc, the target of rising fund activity, is up 14 per cent this year. In LME's maiden report on 'commitment of traders', of the long positions held by money managers at the beginning of August, zinc accounted for about 30 per cent of the total contracts outstanding. This compares with open interest positions of 23.5 per cent for nickel, 24 per cent for copper and 25 per cent for aluminium.
Why has zinc come to enjoy this huge confidence among money managers? Having crossed the technical resistance level of $2,200 a tonne a while ago, a price of up to $2,600 a tonne is now within the sight of bull operators. No doubt, fundamentals have provided an opportunity to zinc bulls. After a surplus of six years, coinciding with world major economies struggling for a breakout from recession, a deficit in zinc is emerging, propelled by forecasts of annual demand growth of five-six per cent. The Lisbon-based International Lead and Zinc Study Group (IL&ZSG) has estimated 2014 first-half zinc deficit at 234,000 tonnes, against a surplus of 28,000 tonnes in the corresponding period last year.
The IL&ZSG estimate surprised many who had thought the current ore supply from zinc mines and inventories of zinc concentrate would be sufficient to meet the requirements of smelters. But the year-on-year rise in world zinc mine production so far this year is less than one per cent, amid the planned closure of some high-profile mines next year and in 2016. Last year saw the closure of two major zinc mines in Canada, with a combined capacity of 355,000 tonnes. According to Agnivesh Agarwal, chairman of Hindustan Zinc Ltd, mine closures and production attrition at operating mines "will eliminate 1.8 million tonnes (mt) of global mine capacity by 2018 and 2.2 mt by 2019". Progressive contraction in zinc mine production apart, the growing demand for galvanised steel from the automobile, construction and electrical appliances sectors, especially in the US, China and other emerging countries, is fodder for bulls. Galvanised steel alone accounts for about 60 per cent of zinc consumption.
But why is the use of zinc in China still growing at more than 12 per cent when the World Steel Association has drastically scaled down that country's steel demand growth in 2014 to three per cent from 6.1 per cent the previous year? A nudge from the government to plug corrosion-related wastages and steel users becoming increasingly quality-conscious largely explains the sustained high demand growth for zinc in China. Is IL&ZSG right in estimating the Chinese zinc market will have a deficit of 332,000 tonnes? Many believe China has been indulging in "over imports" of zinc, which ends in bonded warehouses as part of the shadow banking sector's collateral credit-financing market. Much of this zinc may be released into the market if Beijing remains committed to disentangling unacceptable credit financing.
The world zinc market is poised to be supported as prices move from one high to the next. Strong demand growth at a time when a number of big mines are approaching the end of their lives will lead to increases in physical deficit and a rundown in stocks at registered LME and Shanghai warehouses. India will be an exception; here, thanks to a proactive exploration programme and transition from open-cast to more cost-effective and productive underground mining initiated by Hindustan Zinc, will improve ore supply.
Hindustan Zinc is on course to deliver 15 mt tonnes of ore and 1.2 mt of mined metal by 2018-19. Through a robust exploration programme, it continues to find more ore reserve than it takes out from its mines. India will need all the extra metal for its own use and exports. Not only is the country targeting crude steel capacity of 300 mt by 2025, more and more steelmakers are also creating new galvanising lines.
