Ravindra Rao
The sudden escalation in trade tensions between US-China since early May this year have led to trend reversal in base metals pack.
After an upbeat first quarter, most commodities in metals pack have either given up their gains completely or have come off their yearly highs. The metal that has been worst hit amongst them is Zinc.
LME three-month forward Zinc prices that were up more than 18 percent in first quarter of 2019 is now trading down 5.5 percent year to date.
This change in Zinc's fortunes from one of the best performer to the worst performer has been due to weak macros as well as bleak fundamental factors.
On the macro front, apart from escalation in trade tensions, the metal has also come under pressure amid signs of slowdown in global economic health.
A series of mixed to weak data from major consumers China, US and Euro Zone have fanned worries over global economic health, which in turn has dented demand outlook for metals.
Furthermore, on the fundamental front, expectations of easing tightness in the physical market due to improving supply especially from China along with reports of narrowing deficit in physical market and higher stocks at SHFE have also weighed on the prices.
According to data released by China’s National Bureau of Statistics, Zinc output in the nation rose by 18.9 percent in August y-o-y to 528,000 tonnes while cumulative output for first 8 months of 2019 stood at 2.95 million tonnes up 7.2 percent from sale period last year. Meanwhile, according to latest data from ILZSG, global zinc market deficit in first seven months of 2019 stood at 106,000 tonnes as against 170,000 tonnes in same period last year.
The only bright spot in the otherwise bleak fundamentals is falling stocks at LME warehouses. However even this decline in offset by a buildup in stocks at SHFE warehouses. Zinc stocks at LME have declined more than 67,000 tonnes, and at 62,925 tonnes, are inching towards its 1991 lows of 50,425 tonnes in early April. However, stocks at SHFE have risen nearly 59,000 tonnes year to date; resulting in modest 8,000 tonnes decline in overall visible stocks.
Overall we believe there is more pain in store for the Zinc market in coming months unless we see some positive turnaround on macro front.
(The author is Head – Commodity Research at Kotak Securities.)
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