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Global trade tensions hitting zinc hard

Expect Zinc to continue its weakness in the week ahead and MCX Zinc prices might fall towards Rs 190.

ET CONTRIBUTORS|
Jun 27, 2019, 08.18 PM IST
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Commodity Summary
MCX

ZINC
By Yash Satish Sawant

All the industrial metals have had a tough ride since mid-2018 over rising global tensions and the year 2019 is no different with all the base metal prices falling down to 2011 price level.

Zinc prices have been trending lower in line with falling trend in base metals, with a fall of more than 12 per cent just in a matter of two months (May 2019 – Mid June 2019).

Zinc, which is primarily consumed for galvanization i.e. a coating to protect iron and steel from corrosion has been hampered by rising concerns over global demand, global economic slowdown and uncertainties.

US-China trade war turns ugly
Growth prospects for the industrial metals were under clouded by the intense trade tension between the US and China. The biggest economies in the world got in to a tariff spat since early 2018 dampening the demand outlook for industrial metals and pushing the prices lower.

1

Tension between the two nations eased a bit when they agreed for a 90-day truce in March 2019. However, chances of possible trade deal faded away soon after US held China in contempt of not compelling with a certain clause, which was agreed during the trade talks after which President Trump hiked the rate on the $200 billion worth of Chinese imports in US from 10 per cent to 25 per cent. The hike in interest rates escalated the ugly trade dispute which had hampered the base metal prices since 2018.

Even China retaliated with a fresh round of tariffs with fresh round of tariffs on $60 billion worth of US imports. China imports $120 billion worth of goods from US and it has imposed duties on $110 billion worth of goods till now i.e. it is not left with any further good to impose duties on. However, China stated that it might use its dominance in rare earth metals to get back at US by imposing tariffs on imports of rare earths.

The intense trade war between the superpower nations had a severe impact on the economies of both the countries. Weakening of the manufacturing sector over rising global uncertainties and slowdown in the economy dampened the demand prospects for zinc and other industrial metals.

2

The investors will now expect positive outcome of the trade negotiations which will commence before the presidents of the US and China meet at the world leader meet in Japan in end of June.

Inventory levels drop down
As per the reports from the ILZSG (International Lead and Zinc Study Group), the global zinc market witnessed a deficit of 15,000 tonnes in the first quarter of 2019 as compared to a surplus of 37,000 tonnes in the similar time frame last year.

The inventory levels for Zinc were also depleting at the LME-approved warehouses. Inventory levels dipped over 60 percent from August 2018 to mid-June 2019 (From 250,000 in August 2018 to 100,150 in June 2019). Declining inventory levels signaled towards increasing demand and a possible shortage on the LME market.

However, the decline in inventories and a possible boost in demand couldn’t support the prices as the global tensions weighed on the metal prices.

Zinc Inventories have dropped down by 900,000 tonnes since the beginning of 2014. Rapid increase in Zinc mine closures over the past few years and tighter production curbs in China considering their environmental problems led to downfall in the inventory levels.

3

However, markets expect a rise in the global production from the world’s biggest metal consumer China. With the production curbs easing off in the world’s biggest metal consumer it is expected to raise production of Zinc by over 3 percent in 2019. In 2018, Zinc production in China was down to 4.53 million tonnes i.e. 4.6 percent lower than 2017. Tight raw material supply, longer maintenance periods and the relocation of the country's top smelter led to a downfall in China’s Zinc production.

With new capacities coming in Australia and easing of production curbs in China the global Zinc mine production is expected to grow at over 6% as compared to a rise of 1.3% in 2018. But with rising infrastructure expenditure demand for Zinc will continue to grow in the coming years and we might witness a deficit in 2019 as well.

Outlook
With new capacities coming up and easing of production restrictions in China, Zinc production is expected the go up.

Meanwhile, the demand for Zinc is poised to increase with the China BRI (Belt & Road Initiative) coming up which consists of various infrastructure expenditure. The project includes extensive use of metals like Zinc and Copper which might boost their demand as well as the prices. Moreover, even China will increase their infrastructural activities to help their economy pick up.

Investors will have an eye on the world leaders meet at the 2019 G20 Osaka summit which is to be conducted in Japan in the end of June where US President Donald Trump will likely meet Chinese President Xi Jinping. The two countries have decided to resume with the trade negotiations after the presidents of the two countries meet in Japan. A positive outcome of the trade talks might push the metal prices higher.

We expect Zinc prices to continue its weakness in the week ahead and MCX Zinc prices (CMP: Rs 205 per kg) might extend its fall towards Rs 190 from a month perspective.

(Yash Satish Sawant is Research Associate - Base Metals, at Angel Broking)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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