Ever since the sudden risk aversion was witnessed on January 21 this year amid reports of coronavirus outbreak in China; the whole of base metals pack has come under pressure. Of the lot, however, Zinc has noted biggest slide. LME three-month prices have slid to June 2016-low of $2,041 and at $2,046 as on February 24, prices are down nearly 17 percent from November 2019 high of $2,459.5.
The decline in prices has been on the back of growing worries over economic impact of coronavirus outbreak in China and more recently due to fears of its contagion to other nations which in turn may dent demand outlook for the metal.
The outbreak, which originated in China's Wuhan region, the capital of Hubei province, has so far claimed 2,663 lives in mainland China with more than 77,500 people infected. More recently the infection has spread to nations like Italy, South Korea, Iran and other Middle east counties like Afghanistan, Kuwait and Bahrain. Overall the virus has spread to 29 other countries and territories with over two dozen virus death as per Reuters tally.
China in an effort to contain the spread has imposed travel restrictions, including complete lockdown of Wuhan and other cities in Hubei province. These measures have led to factory closures disrupting global supply chains thereby fanning worries over its impact on global health. Highlighting the growth worries, the IMF over the weekend warned that the virus may likely cut off 0.1 percent from global growth, and drag down growth for China’s economy to 5.6 percent, which is 0.4 percent lower from its January outlook and the lowest level of growth since 1990.
Apart from worries over macro, Zinc prices have further come under pressure tracking rebound in stocks at exchange warehouses along with signs of easing tightness in physical market.
Zinc stocks at LME have rebounded more than 50 percent from nearly two-decade low of 49,625 tonnes hit in early February and at 75,375 tonnes as on 24th February stand near highest level since August 2019. Meanwhile Zinc stocks at SHFE have jumped more than 400 percent this year and at 1,43,164 tonnes as on 21st February stood at highest level since April 2018. Furthermore, the spread between LME Cash to three-month has flipped to $19.5 contango; highest since September 2018 from nearly $24 backwardation as on 21st January signaling easing tightness in physical market.
Going forward the bearish trend is expected to persist however the metal remains vulnerable to sharp short covering amid any signs of containment of virus.
The author is VP- Head Commodity Research at Kotak Securities.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.