Fundamentals
Zinc rallied to its highest since May 2015 last week as bearish speculators scrambled to close out positions. Fresh shutdowns in China's steel sector added to mine supply concerns for the zinc to ignite a short-covering rally. China plans to cut steel production by 2.91 million tonnes this year.
China has been shuttering mines as part of a major mining reform program aimed at cleaning up its lead and zinc mining sector.
Meanwhile, Chinese zinc smelters are slashing fees for processing ore concentrate into refined metal by 20%, as competition to secure ore concentrates heats up. This could be a big sign of an impending squeeze in zinc supplies, which in turn could create another run-up in prices.
Zinc has outperformed other base metals over the last eight months as supply pressures mount on widening metal market deficit, low spot zinc treatment charges (TCs), coupled with new safety regulations in China, which could limit supply from the region.
The global zinc markets would be on tenterhooks, especially after Glencore stating it could restart production “if and when it wishes” and the company not raising its CY16 guidance despite the zinc price rally.
According to International Lead and Zinc Study Group’s preliminary report dated Aug 22, 2016, the global market for refined zinc metal saw a higher deficit (metal production less metal usage) of 138KT in Jan-Jun 2016 versus 64KT (revised to 121KT) in Jan-May 2016. As of Jan-Jun 2016, global refined zinc metal production declined 4.2 per cent YoY while global usage increased marginally by 0.6 per cent YoY. ILZSG has attributed the production decline to lower metal production from India. Hindustan Zinc’s lower refined metal production would have likely contributed 50 per cent to the loss in global output.
Also, Chinese spot zinc TCs, i.e. fees paid by miners to smelters to convert ore into finished metal, have hit at a four-year low in China at $100/tonne. This points to the fact that smelters are facing trouble in finding zinc concentrate. The marginal increases in global mine output during CY16 (June output at a 10-month high but down 6.7 per cent YTD) has failed to increase availability of concentrate for Chinese smelters. Hence, they may have to shut operations if availability does not improve significantly, providing a fillip to zinc prices. With HZ likely to ramp up mine and metal production in H2CY16 as mining of ore takes over mining of waste in sequencing, the company should benefit from the uptrend in zinc prices.
Technical Aspect
Zinc prices elevated for second consecutive week and gained 1.20 percent on a closing basis. Prices are trading on the higher range of ‘rising wedge’ which is considered as a reversal pattern.
Moreover, an immediate resistance at Rs.157 kg could attract new supply to get benefit of high levels. Technically, oscillators support the fact that prices are trading in an overbought zone and could take a hit anytime soon.
On Monday, Zinc made a high of 156.45 on MCX division and now trading at 155.50.
Zinc has support at 150 and resistance at 157---160.
Trend looks weak and could test its support level of 150 mark.
Three consecutive close + Weekly close below 150 will see more downside panic till 140--132 mark in days to come else it could test its resistance level of 157--160 again.
Further upside rally will see only close above 160 mark.
RSI indicate negative divergence on daily charts while we are expecting Zinc to take up to Fibonacci retracement level of 38.2% in near terms which stands close to 132.
Traders can follow the strategy to sell Zinc or Zinc mini around Rs.156-157 with stop loss above Rs.158.80 for the downside target of 140—132 mark.
Recommendation – Sell Zinc or Zinc Mini around 156—157 with stop loss 158.80 for the initial target of 140 and then to 133--132.
Conclusion – Supply constraints will keep prices firm, long term target looks 200+ for zinc.
Technically Zinc looks tired at upper levels trading in overbought zone and forming rising wedge pattern which is a reversal pattern.
We expect price to correct in medium term till 140 - -130 mark for healthy rally up to 200+ mark.
News source – Financial Express
Chart Source – Investing.com
