Ravindra Rao
LME three-month Zinc prices that had been clocking gains for past two weeks edged further up yesterday hitting a two-month high of $2,448 a ton. Prices, however, are down nearly $30 today tracking retreat across metals complex.
The major reasons for the rally in Zinc have been optimism over US-China trade deal, signs of stabilisation in top consumer China and lower stocks at LME warehouses.
On the trade front, sentiments have surged after US-China signed a Phase 1 deal last week which will roll back some tariffs and see China boost purchases of US goods and services by $200 billion over two years.
Meanwhile, in top consumer China, a recent series of upbeat data has helped ease worries of a slowdown in the region and is signalling stabilisation. Data released last week showed that both industrial production and retail sales grew at a healthy pace of 6.9 percent and 8 percent in December beating market expectation of 5.9 percent and 7.9 percent respectively. Also, Q4 GDP grew at a steady pace of 6 percent even as growth for the year 2019 slowed to 6.1 percent, weakest since 1990.
Meanwhile, on fundamental front, stocks at LME hover near 20-year low of 51,000 tonnes which in turn has led to backwardation between LME Cash to three-month.
Despite the abovementioned factors the Zinc market faces stiff resistance amid recent rebound in stocks at SHFE warehouses along with rising output from China.
Zinc stocks at LME jumped by 8,666 tonnes last week and at 40,433 tonnes stood at the highest level since November 2019. Meanwhile, in top producer China, data from the National Bureau of statistics today showed that Zinc output in December rose by 19.5 percent to record high of 607,000 tonnes. Furthermore, cumulative output for the year 2019 rose by 9.8 percent to 6.236 million tonnes.
Going forward, rising output from China amid higher treatment charges and expectation of global refined Zinc market flipping to supply surplus after being in deficit for four straight years may cap the upside.
(The author is VP- Head Commodity Research at Kotak Securities.)
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Source: Money Control
