Zinc has shown some signs of recovery but the overall performance in future is likely to be worse than previously expected as the market has factored in a deluge of supply for the metal used to galvanize steel, according to a Reuters survey.

Arbitrage activity against Shanghai prices also played a role in surging of prices in predominant market London. Furthermore, the prices remained firm on global cues from European manufacturing data, continuously falling LME stocks. The price gains meant plans to cut output have been shelved by many producers, leading to higher forecasts of the surplus in a market estimated at around 12 million tonnes this year.

The survey showed the zinc surplus this year could hit 348,000 tonnes versus 209,500 tonnes in January. The global zinc market was in surplus by 180,000 tonnes in the first four months of the year, according to the Lisbon based International Lead and Zinc Study Group's (ILZSG) latest monthly bulletin.

Furthermore, global refined zinc use was 3.941 million tonnes compared with 3.197 million in January April 2009. World refined zinc output rose to 4.121 million tonnes from 3.456 million a year earlier.

Moreover, China produced 2,056,000 tonnes of refined zinc in the first five months of the year, up 34.6% from a year earlier, according to the National Bureau of Statistics. Output of mined zinc rose by 44.1% over the same period to reach 1,376,000 tonnes. Last month, it was stated here that zinc prices after completing 6 month long a­b­c type zig­zag correction can show a strong surge towards Rs.90­95/kg range.

While this held true for July, one can now anticipate some profit booking looking ahead. Structurally, the market seems to be building a long term base around 75­85 zone. This would mean some sideways movement to persist on weekly charts indicating alternating bouts of up and down months for the remainder of this year.

In light of this, traders are advised to initiate short positions near resistance levels during August.

Courtesy: Religare Commodities

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