Higher supply, lower inventories keep Zinc prices delicately poised

The Zinc prices will face selling pressure on rising production in China.

Sakina Mandsaurwala

Precious metals prices remained on the sideline last week due to absence of any important economic indicator. Last week, Comex Gold prices traded flat at 0.08 percent while Comex Silver prices traded lower by 1.25 percent.

In energy complex, Nymex Crude came under intense pressure falling by more than 5.4 percent due to the outbreak of coronavirus in China.

Natural gas closed with huge losses of more than 5.5 percent as the inventory remained above the five year average levels on expectations of above normal temperatures. Base metals prices too continued to witness selling pressure – most of the metals fell by almost 4 percent during the previous week.

While LME zinc inventories are currently sitting at two-decade low level at 50,450 tonnes, China is producing record level of production. Also, treatment and refining charges have climbed from USD 30/tonne in 2018 to USD 300/tonne this year, providing higher margins to the smelters and thereby increasing production.

Lower levels of inventories and higher production is keeping the investors puzzled. The lower inventory levels are keeping the cash to LME spreads volatile and pushing it towards backwardation.

We believe, moving forward, Zinc prices will face selling pressure on rising production in China. We will see the trend negative as we move towards the real supply surplus situation in Zinc. We expect MCX Zinc Mini prices to trade with negative bias in the medium term.

Any upside in Zinc prices towards 190 to be used as a good selling opportunity for the downside target of Rs 165-170/tonne. Currently, MCX Zinc Mini prices are trading at Rs 181/kg.

The Author is Commodity Analyst at Narnolia Financial Advisors.

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