Zinc prices may come down due to high inventories and output
Sharad Matade 04 November 2010

The price of zinc as well its inventory levels and global production is rising. Despite the depreciation of the US dollar, analysts feel that zinc prices will remain below $2,550 level.

Even as zinc prices had hit a 10-month high of $2,600 per tonne last week, prices will remain below or at $2,550 per tonne in the near future due to surge in inventories and production, said analysts.

"We don't think prices will go up beyond $2,550 per tonne. However, as of now, most of the things will depend on the US Federal Reserve's stimulus package. The meeting is going on and the picture will become clear after the meeting," said Navneet Damania, senior research analyst from Anand Rathi Financial Services Ltd. 

As of 2nd November, zinc price was quoted at $2,430.5 per tonne on the London Metals Exchange (LME) with an inventory of about 6.32 lakh tonnes.

Zinc prices have been going up since past two months so is the inventory as well production at various places.

"Zinc prices are shooting up since last two months primarily because of the depreciation of the US dollar as well as due to improvement in the manufacturing Purchasing Managers' Index (PMI) globally (the global manufacturing PMI increased to 53.7 in October from 52.5 in September). However, the price rise is not supported by inventories, which also have gone up, and there are no signs of a fall in inventory levels. This is a rare situation where prices have gone up despite high inventories, so prices of zinc would not sustain on a continuous basis," said a research analyst who does want to be named.

He said, "It is expected that the dollar index will not fall below 75-mark and if there is rebound, then the dollar index would move towards 80 or more which in turn will trigger a fall in zinc prices."
Unlike other base metals like copper and nickel, the present production of zinc is more than demand. According to the International Lead and Zinc Study Group (ILZSG), the global refined zinc market is expected to remain in surplus by 2.33 lakh tonnes in 2010 and by 1.61 lakh tonnes in 2011.

Global refined zinc market had a surplus of around 1.66 lakh tonnes over the first eight months this year, while global production registered a growth of 15.3% during the same period, ILZSG added.

During January to August, ILZSG said, the demand for refined zinc metal grew by 17.8%, driven by strong recoveries in Europe, Japan and the Republic of Korea, while China's output rose 23.9% to 33.3 lakh tonnes same period last year. It is estimated that China will add another 3 lakh tonnes of new refined production capacity in the last quarter of 2010, which may put some pressure on prices in the coming months.

Although Shenzhen Zhongjin Lingnan Nonfemet, third largest zinc producer in China, closed one unit at its Shaoguan Lead and Zinc smelter due to environmental concerns, analysts feel it will not have any major impact on the country's total production.

"The China smelter shutdown decision had already fuelled prices marginally, but we don't see much impact as the smelter's monthly output contributes less than 5% of China's zinc production," said the analyst. 

China's production and consumption of zinc will also play major role in price trend.

According to an analyst from Systematix Shares and Stocks India Ltd, China has vast reserves of zinc and is self-sufficient in zinc production and the country hardly depends on imports. So even the country's demand for the metal goes up, prices will not shoot up, he added.

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