By Biju Thomas
Zinc demand comes from construction and consumer demand that varies from automobiles to brass and electronics.
In recent years, rapid consumption growth in Asia has driven demand that has helped to outstrip mining supply (supply/consumption ratio <1).
In 2007 and 2008, production has continued to grow while consumption growth has slowed. Any slowdown in construction industries and consumer demand (as has been seen in 2007 and 2008) will cause zinc demand to fall.
Over 7 million tons of zinc is produced annually worldwide. Nearly 50% of the amount is used for galvanizing which protects steel from corrosion. Approximately 19% are used to produce brass and 16% go into the production of zinc base alloys to supply e.g. the die casting industry.
Fundamentals:
The supply of Zinc comes from two sources: mining and recycling. The supply from mining, like many other metals, is largely inelastic to short term price changes. To start a mine, it takes years of planning, approvals and construction. The supply of recycled zinc is also not very responsive to price changes because recycled zinc is a largely a by-product of recycled steel.
According to International Lead and Zinc Study Group (ILZSG), the global zinc mine production will increase by 3.9% to 11.57 million tonnes in 2008 and by 5.2% to 12.2 million tonnes in 2009.
China is the world’s biggest producer and consumer of the metal and their demand is forecast to rise by 13.2% in 2008, slightly less than in 2007. However, in 2009, a more significant slowdown in the rate of increase in usage to 7.6% is expected. Elsewhere in Asia further growth is anticipated in India.
But usage in the Republic of Korea is forecast to fall, Europe and the United States will witness declines of 2.2% and 3% respectively this year with usage in both regions remaining flat in 2009.
The period 2004-2007 saw a rapid decrease in Zinc warehouse inventories due to growing demand in Asia. Since bottoming out in 3Q of 2007, Zinc inventories have only recovered slightly as demand has remained very strong.
From Oct 2007 onwards inventories started to rise on increasing supply and reducing demand. The global slowdown started at that time and peaked in the 2008.
At current price levels, the global economy does not foresee any sudden disruption in supply or investment demand for the metal. Some of the major producing mines may limit their production due to lower selling price on the commodity, irrespective of the decline in demand.
Technical Outlook:
Average MACD crossed below the zero line of the indicator and bounced towards the zero line, suggesting the short-term recovery from the bottom levels. But only a crossover of the average above the zero line would signal a bullish reversal again.
Prices are above the short term 9 day EMA and 21 day EMA, supporting the shot term bullish ness of the commodity, while RSI moving in the neutral zone.
Therefore zinc prices could find the support level and subsequently test the resistances levels. In the medium term basis supports held at Rs 57.60, 54.60, 52.20 and 49.40; and resistances are Rs 62.10, 64.10, 67 and 70.
However trading above 62.10 might be in favor of bulls.
