At this time last year, there was nothing really bullish about zinc.
Global zinc markets were in surplus and prices were heading lower while sentiment in the mental complex was pretty bearish. But the picture quickly turned around earlier this year. For zinc buyers, the right time to hedge/buy forward was in April, when prices were still below $1,900 per metric ton, as we pointed out in our Monthly Outlook.
Zinc investors have been drawn in by a narrative of mine closures and a resulting tightening of the supply chain. As zinc prices weakened over the past three years, more than 1.5 million mt of mine capacity was either idled or closed permanently. These closures were further exacerbated when Glencore announced plans to suspend 500,000 mt of production last October.
According to the latest data compiled by the International Lead and Zinc Study Group, the global market for refined zinc metal was in deficit by 174,000 mt from January to July 2016 with total reported inventories falling by 17,000 mt over the same period.
Is Now a Good Time To Hedge?
Earlier this month, zinc smelter Nyrstar announced the initiation of a hedging program that would lock in prices six month forward. Is this a good move given that prices are on the rise and everyone is still buying into the tempting narrative of supply shortfall?
I think Nystar made a smart move. Now it seems like a good time for producers to hedge for the midterm while on the other side, zinc buyers might want to wait for more attractive prices to hedge again. Here is why:
Zinc has risen in almost a straight line since those January lows. Traders sitting on healthy profits may now be tempted to lock in a bit of downside protection. Moreover, prices are near key resistance levels, meaning that in 2014 and 2015, zinc fell as prices approached $2,400/mt. Traders might again find reasons not to chase prices higher from this point, especially given the spectacular rally seen this year.
Moreover, a zinc rally could run out of steam if miners are tempted to bring production back quicker than originally planned. Chinese mines could respond to higher prices by lifting production and filling any supply gap. Also, bulls are concerned that Glencore could reactivate the 500,000 mt of mine capacity it has idled since late last year.
Zinc is still one of the favorites among metal investors and this rally could continue into 2017. However, zinc has gone pretty ballistic so far this year and although fundamentals might back the story up, we could see a price pullback around the end of the year. Zinc producers might want to hedge some of their production now while zinc buyers might want to wait for better opportunities to time their purchases.