Zinc price rises on dollar weakness, inflation concerns; is it time to sell?

Since April’21, most base metals have posted double-digit gains on the London Metal Exchange with Copper being the stand out performer.

Zinc gained over 9 percent and 10 percent on the MCX & LME, respectively in the above-mentioned time frame. The galvanising metal prices picked up in May’21 on worries of a possible shortage in the global markets amid a recovery in the global economies.

The US dollar index traded lower at 89.92, down 0.30 percent against major currencies. 

Yash Sawant, Research Associate, Angel Broking Ltd said, “Zinc prices strengthened as an increase in taxes on mining companies in prime Zinc & Copper producing nations, Peru & Chile, might limit the output. Also, rising bets on a low-interest rate environment for a prolonged period despite the recent recovery in global economies which reignited inflation worries kept a lid on the US currency which continued to support the Dollar priced industrial metals.”

Reports suggested that smelters stationed in China’s Yunnan province might trim their output to comply with energy consumption norms. The stern environmental restriction imposed by Chinese officials to contain pollution has taken a severe hit on their industrial segment. The increased scrutiny among high-energy consumption industries kept the investors cautious.

Treatment Charge Margins

Treatment charges for Zinc which rose to decade high levels in 2020 ($299.75 per tonne) slipped down to $159 per tonne in 2021. Major zinc producing nations were caught in the virus wave which curtailed the mining activities forcing global smelters trim the treatment fees following the lack of concentrate supply by global mines.

However, the gains for Zinc were capped in the earlier months as there seemed to be no evident shortage in the global refined Zinc markets despite the fall in mine supplies. As per reports from the International Lead and Zinc Study Group (ILZSG), the global refined Zinc output increased by 1.2 percent and ended in an estimated surplus of 533,000 tonnes. Even the Zinc inventories in the LME monitored warehouse rose over 40 percent in 2021 (year-to-date). The excessive surplus in the physical market, the hidden zinc stocks held back the galvanising metal prices, Sawant added.

Outlook

“China’s move towards stabilising the soaring commodity prices might be a considerable headwind for the industrial metals. China vowing to strengthen its management of commodity supply and demand to restrict the "unreasonable" surge in Commodity prices might keep the global investors cautious going ahead," Sawant said.

Moreover, the stringent power consumption norms infused by Chinese officials might not just disrupt the supply but also affect the demand in the largest metal consuming nations.

Also, the expectation of further tightening of their monetary policy by the People's Bank of China (PBOC) might weigh on the base metal prices.

Sawant expects Zinc prices to trade lower towards Rs 215 per kg on the MCX in a month's time.

Technicals

The non-ferrous metal has been trading higher than 50, 100 and 200 days' moving averages but lower than 5 and 20 days’ moving on the daily chart. The momentum indicator Relative Strength Index (RSI) is at 49.90 which indicates sideways movement in prices.

At 13:33 (GMT), the base metal price modestly up 0.03 percent at $2,965 per tonne in London.

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