Time to Buy as Zinc Prices Decline in a Major Way

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Zinc prices have fallen sharply over the past two weeks.

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While others panic and see this decline as the end of zinc’s bull run, I see this price pullback as a great opportunity to purchase the metal at a good price.

The 3-month LME zinc price. Source: MetalMiner analysis of LME data.

After doubling in price since the beginning of 2016, prices are now struggling in the $3,000 per metric ton level. However, the price weakness seems to come from long position buyers exiting those positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. At the same time, we see strong support near $2,500/mt, which could provide a good opportunity to time purchases.

Short-Term Resilient Supply but What About Long-term?

The recent price weakness can be attributed to fears that high prices could trigger more mine supply to come online in China. Refined zinc supply remains resilient in the country. For the first two months, zinc refined output rose by near 4.5% compared to the same period of last year. However, supply might prove less resilient in the coming months.  Some of China’s largest zinc smelters recently announced they will curtail roughly 540,000 mt of annualized capacity over an unspecified period of time. The announcement comes after China’s largest zinc smelter, Zhuzhou, started an indefinite maintenance period for 100,000 mt of smelting capacity earlier in March.

In addition, according to a recent Reuters article, the second-largest zinc plant in North America has been running at 50% of normal operating levels due to a strike that started on February 12. The plant produces around 270,000 mt of zinc per year.

China’s Demand Still Strong

Other analysts might be attributing the recent price weakness to slowing Chinese demand. That really hasn’t been the case. China’s GDP came at 6.9% in the first quarter, the fastest pace in almost two years, up from 6.8% growth in the previous quarter putting the country well ahead its goal of 6.5% annual GDP.

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Construction and infrastructure make up for more than 60% of zinc’s demand. According to Global Finance, Chinese investment in buildings, factories and other fixed assets rose 9.2% for the first quarter while constructions starts surged by 11.6%. In addition, China announced intentions to build a new megacity, which will significantly increase the demand for industrial metals such as zinc

What This Means For Metal Buyers

Despite recent price weakness, zinc’s fundamentals remain strong. It seems way too early to call an end of zinc’s bull run. This month buyers might find a good opportunity to purchase zinc. You can check out our monthly metal buying outlook for monthly strategies on how to time your purchases.

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