Zinc stocks to shine most as global economy recovers

The US economy is expanding at 2.7% annualised pace in the second quarter and continues to remain near full employment. The IMF raised its forecast for economic growth in China this year to 6.7%, from 6.6% forecast earlier, citing expansionary credit and public investment. Japan raised its overall view of the economy for the first time in six months. Confidence among Japanese manufacturers also bounced in June to match a decade-high level recorded in April and is expected to rise for several months. Growth in two largest economies in Europe – Germany and the Britain – is also expected to improve. Britain showed its factory orders hit their highest level in nearly 30 years. The Asian Development Bank raised its 2017 and 2018 growth forecasts for the developing Asia, made up of 45 countries, to 5.9% and 5.8% this year and next, respectively.

While improving global growth is positive for the industrial metals generally, improving fundamentals of global zinc industry make it relatively more attractive. LME Zinc stocks, currently near 270,000 tonnes, are down by 37% and cancelled warrants (stocks earmarked for delivery) stand at a whopping 70%, indicating sharp tightness in the metal. Shanghai stocks, on the other hand, are down by 50% near 78,000 tonne. Besides, zinc stocks at consumers, producers and in exchange warehouses fell to 12,60,400 tonne in April from 13,55,100 tonne in the previous month;

Zinc's prospects brightened considerably after the shutdown of two major mines last year – Australia's Century and the Lisheen mine in Ireland. The two mines had a combined output of more than 630,000 tonne. The shuttering of top zinc producer Glencore’s depleted Brunswick and Perseverance mines in Canada in 2012 brings total tonnes going offline since 2013 to more than one million tonne. In October 2016, Glencore announced the closure of its lead and zinc mine in Australia due to depletion of reserves. The International Lead and Zinc Study said that the global zinc market deficit widened to 92,400 tonne in April from a revised deficit of 72,700 tonne in March. In the first four months of 2017, the zinc market was in a deficit of 112,000 tonne versus a deficit of 20,000 tonne in the same period last year.

Although the first half of 2017 did not do wonders for zinc, the second half looks more positive. Average zinc price on London Metal Exchange has moved up nearly 10% year to date in 2017 and 22% year on year. With improved industry fundamentals and also in global economic outlook, both zinc metal and zinc stocks are likely to remain firm at least for the next one year.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd