Year 2020 has not been good for any base metal, and zinc prices continued their downward journey for the second consecutive year, falling by around 11 percent in the time frame Jan-Feb 2020. Zinc prices declined by 5 percent in 2019.
Truce between US and China, the first phase deal signed on January 15, 2020, was not enough for the investors to cheer. Trade and tariff dispute had hampered the Industrial metal prices since early 2018.
Soon the optimism over the interim trade deal faded as the markets were up against the global epidemic named Coronavirus. The lethal virus broke out from China and branched out in multiple nations which raised genuine concerns over the global economic growth. In a short span of time the virus outbreak has killed over 2,800 people in China and infected about 80,000 around the globe.
The rapidly spreading virus has hampered the Chinese economy in turn denting the demand prospects for Zinc and other industrial metals. China being the major consumer of industrial metals; worries of slowdown in China's economy weighed on the Zinc prices.
China's central bank trimmed the interest rate on its medium term loans and infused liquidity in their markets to counter the economic fallout reflecting the virus breakout. However, even extensive stimulus measures undertaken by China to fight the virus breakout couldn't support Zinc. The impact of the Coronavirus is much severe than earlier assessed by the markets.
Zinc Inventory builds up
Zinc Inventory levels on the LME warehouse continued to fall in 2020 also hitting its 20-year lows of 50,000 tonnes as on January 31, 2020. On the other side, Zinc might be in surplus in 2020 over prospects of rising global mined output after four years of continuous deficit.
Production was low in 2019 due to major smelter outage around the globe amid subdued Chinese production reflecting their stringent environmental norms. However, the trend changed in February’20 after the inventory levels surged on the LME and the Shanghai Exchange.
Surging inventory was primarily on account of fall in demand from the China. The lethal virus breakout in China hampered the demand prospects for industrial metals which in turn pushed inventory levels higher. China has imposed transport restrictions to try and counter the spread of Coronavirus further boosting the overall inventory of Zinc.
The Coronavirus has been spreading to multiple nations which might hamper the global growth prospects and weigh on the Zinc prices. Moreover, constant build up in the inventory levels on the Shanghai Exchange and LME might raise fears of oversupply and further pressurize Zinc.
Even Henan Yuguang Gold and Lead (Zinc smelting capacity of 3, 00,000 tonnes) which is one of China’s biggest lead and zinc producers trimmed its Zinc output by 50 percent due to Coronavirus outbreak. Shrinking demand for Zinc was one of the primary reasons behind cutting the output by half.
The impact of the virus can be much severe and might hamper the demand prospect for Zinc and other industrial metals. Considering the wildly spreading Coronavirus, we see Zinc prices falling to Rs 140 per kg in a month’s time frame.
The author is Research Associate - Commodities at Angel Broking.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.