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With industrial activity recovering in China, will zinc and lead gain further?

June 08
00:05 2020

Hareesh V

Zinc and lead, the commodities which are largely used for industrial applications have clawed their way back from a four–year low.

While price of zinc in the benchmark London Metal Exchange recuperated by more than 13 percent, lead gained over 8 percent since March. A similar trend is being witnessed in Indian futures prices as well.

The novel coronavirus crisis, sharp plunge in demand and fears of recession have adversely hit the demand of industrial metals, particularly from the top consumer China. Industrial and manufacturing activities across the globe have also declined to decade low levels.

However, optimism over a quick global economic turnaround after better industrial data from China lifted the base metal prices recently. A gaining equity market and reopening of several economies after the pandemic-triggered lockdown have also lifted the demand prospects of metals.

The official and unofficial Purchasing Manager’s Index in China is bouncing back into expansionary territory indicating a turnaround in the manufacturing process.

Meanwhile, exports have remained under pressure as factory activity and consumer confidence across the rest of the world is picking up very slowly. Export orders from China declined for the fifth consecutive month in May with more than half of the companies reporting very low demand.

Concerns over shortage of these metals due to an adverse impact on global supply chain also supported the prices. Easing of nationwide lockdowns in many countries increased the demand for these metals in construction and transportation segments as well. A cut in short positions by money managers on expectations of a price recovery also lifted the sentiment of the metals.

Better demand expectations narrowed the market surplus of these commodities. As per International Lead and Zinc Study Group data, the global zinc market surplus declined to 47,300 tonnes in March from a revised surplus of 1,40,500 tonnes in February. The global Lead market surplus is also expected to be narrowed to 14,200 tonnes in March from an overhang of 16,400 tonnes in February. At the same time, lead and zinc inventories in Shanghai and London warehouses are currently placed near multi-month low levels.

However, there are expectations that the momentum may no longer continue in the near future. Demand recovery in post-lockdown China may soon lose steam due to feeble export demand. Global industrial activities may remain on the lower side due to the negative impact of the pandemic. Looming tensions between US and China are likely to worsen the trade relations further. This may weigh on the base metal demand from China. Zinc and lead prices are less likely to be benefited from the government’s stimulus programs as well.

On the price front, the upside turnaround point for LME Zinc is $ 2,560 a tonne.

Once again, if prices close below $ 1,800 mark, it would signal a major liquidation pressure in the commodity. In MCX, prices may vary in Rs 132-170 per kg levels initially, breaking any of the sides would suggest a fresh direction to the commodity. In LME Lead, major support is placed at $ 1,750 and resistance is at $ 1,800 a tonne. MCX prices are most likely congested inside Rs 160-122 a kg levels in the near future.

(The author is Head Commodity Research at Geojit Financial Services.)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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