Zinc: An escape from the selling onslaught

Sugandha SachdevaA brief respite has been seen in the zinc prices, bringing with it a ray of hope for further recovery after four consecutive weeks of trading on a fragile note .The hard metal tried to break past Rs.122/kg mark on the higher side, but the feeble attempt failed and it finally succumbed to selling pressure. Bearish army got dominant with time thereafter, pushing prices as low as Rs.105.20/kg which corresponds to a five year low in the metal. Slackening demand from the biggest user China and mounting inventories pressurized the base metal’s market. The metal, used to rustproof steel, outpaced in the base metals space until early this summer, thereafter which the prices witnessed a complete trend reversal. The steep price decline can be attributed to a confluence of factors, including subdued global demand growth and record refined output from China. China’s August zinc output was up 7.9 per cent on year at 531,024 tonnes while imports remained weak, painting a bearish picture for prices. There was hardly any metal in the entire base metal space which escaped the selling onslaught that accelerated since the mid of September.Zinc inventories at the key LME warehouse in New Orleans have surged 43 per cent since the beginning of August, to nearly 609,000 tonnes. According to a report from Reuters, major zinc producer Glencore may be dumping zinc metal in the market. It makes sense that this big inflow of metal would be coming from Glencore, with the firm saying last month that it wants to reduce its marketable inventories of metals by up to $1.5 billion. However, the future prospects are slightly rosy for the metal. The payroll data released by the ADP in US is signaling a pick-up in the labor market. The gains in hiring came despite job losses in the energy and manufacturing industries, a sign that the US labor market continues to gather steam. However, the key US non-farm payrolls data was weaker than expected in September, but this is also ringing positive tunes for the metal’s price going forward. It may dissuade the US Fed from raising interest rates in its October meeting, boosting investors’ risk appetite. Moreover, US GDP data may also provide some comfort and support upside in the metal. The rating agency Fitch recently held its US GDP forecast unchanged at 2.5% in 2015 and 2016 and at 2.3% in 2017. China’s official purchasing manager’s index came in at 49.8 last month, after a reading of 49.7 in August and better than expectation of 49.6, as per the latest reading. Fitch kept its Eurozone and UK economic forecasts unchanged as well. Some weakness creeping in dollar index of late, is also providing positive cues for the metal’s outlook.A close look at the price set up also echoes a phase of recovery in prices, as prices look to move out of the shackles of the bear camp. Prices had lost nearly 14 percent from the recent highs, but have witnessed a rebound from around Rs.105/kg ,which corresponds to 61.8% retracement level of the move from sub 75 level to 150 mark tested in May 2015.This has kind of formed a ground level around that mark. After traversing through troubled waters, prices may take a breather now. The salvage situation in the metal may open the room for further upside towards Rs.115-118/kg levels. Buying is recommended in the metal around Rs.107/kg mark with a stop loss placed below Rs.101/kg, eyeing levels of Rs.115/kg and Rs.118/kg at MCX in near term.Author is AVP & incharge- metals, energy & currency research, Religare Securities