Rising demand to keep Zinc prices firm

Dec 3, 2012, 08.00AM IST
(However, the slight increase…)

By: Naveen Mathur

Zinc is the fourth most used metal after iron, aluminium and copper. It occurs naturally along with other base metals, such as copper and lead, in ores. Sulfides are currently the major source of supply for zinc. A versatile metal, zinc plays an important role in a wide range of industrial applications. It is used to protect steel from corrosion and has been known for its galvanising properties for a long time.

The protective cover that the metal provides to iron through electrolysis is called galvanising. Zinc's usage as a galvanising agent is the highest at 47%, followed by that in brass and bronze (19%), as an alloy (14%), and for chemicals and die casting at 8-9% each. It is also used in the manufacture of batteries as well as other electrical and consumer goods.

The total global refined zinc production stood at 13,095,000 tonne in 2011, and is currently at 13,342,000 tonne. China is a major producer as well as consumer of the metal, contributing 51% to the total refined output. India (8.7%), South Korea (7.3%), Canada (4.8%) and Japan (5.6%) are other major producers of zinc. Around 43% of the global refined zinc consumption is by China, followed by the European Union (17%), United States (7%) and 4% each by India, Japan and South Korea.

The consumption in China has risen from 23% in 2006 to 43% now, while a decline has been witnessed by the second largest producer of the metal, the EU, where consumption has fallen from 22% in 2006 to 16.2% as the economy has been facing a recession for the past three years. The Indian consumption, too, had witnessed a modest rise of 4.5% from 2% in 2006.

The trading in zinc started on the London Metal Exchange (LME) in 1915. In India, the metal is traded extensively on the Multi Commodity Exchange (MCX). On the LME, zinc prices touched a historical high of $4,580 per tonne in 2006 on account of metal deficit in the global markets. Since then, the prices have corrected 57% and the metal is currently trading at around $1,956.50 per tonne.

The prices were also weighed down by the financial crisis, which hit the global markets in 2008. They are currently trading below the $2,000 per tonne level since the major economies, such as the EU and China, are facing headwinds of slower economic growth. The second largest consumer of the metal, the EU, is reeling under debt concerns causing the demand for the metal to reduce, which is further weighing on zinc's prices.

Â  The other factor attributing to the bearishness in prices is the supply glut in the global markets. The output has surpassed demand since 2007 after prices hit a record in 2006, encouraging the smelters to increase supply.

Hence, the glut in the previous years made the producers reduce the output, which has currently provided a floor to the prices. In the domestic markets, the prices touched a historical high of Rs 208.30 per kg, tracing the international prices. The prices on the MCX are currently trading at around Rs 107.75 per kg. Since the beginning of the year, zinc prices have risen 8.8% more than the LME prices due to the depreciation in the Indian rupee.

In the coming months, zinc prices are expected to trade on a firm note due to the expectations of an improving demand from the key consuming nations, particularly China and the US. The demand for the metal is likely to derive strength from the revival of the manufacturing and housing sectors in the regions. However, during the year, the zinc market has continued to witness a surplus.

According to the latest report by the International Lead and Zinc Study Group (ILZSG), the surplus stood at 1,37,000 tonne in the first nine months of 2012. The commercial stocks, which comprise western producers, consumer merchants, and the London Metal Exchange, rose to 18,54,600 tonne in August 2012, which is an increase of 0.31% compared with 18,48,700 tonne at the beginning of the year. This is likely to restrict the zinc prices from rising sharply.

(The writer is Associate Director, Commodities & Currencies, Angel Broking)