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UNDERSTAND THE ZINC MARKET
Introduction
Traders looking to diversify their portfolios or to experience greater risks are often attracted to commodity investments, including commodity derivatives. One of the commodities traded in the Indian markets is the metal zinc. In terms of tonnage, zinc is the fourth most produced metal in the world - following iron, aluminium and copper. While this article does not give you any specific commodity tips, it does explain the basics of the zinc market so that you can seriously consider trading in zinc or its derivatives, so read on.
What are the uses of zinc?
It is used primarily as a coating for iron and steel to prevent corrosion, as a metal in die-casting and as an alloying metal in bronze and brass. It is also used in rubber, chemical, paint, electrodes, dry batteries and agricultural industries.
Where is zinc found?
China leads the world in the production of zinc (at 4.3 million tonnes), followed by Peru, Australia, India (at 800k tonnes) and the USA. In India, Rajasthan has over 90% of the share of zinc production in India. However, India imports zinc concentrates from many countries including the USA.
Understand zinc futures
Zinc futures (i.e. agreements to buy a fixed quantity of zinc on a fixed date at a fixed price) are usually bought by producers of steel (or other products in which zinc is a major raw material) in order to protect against volatility in zinc prices. However, they can also be used by speculators who trade in zinc futures. Zinc futures are traded greatly on London Metals Exchange (LME), Chicago Mercantile Exchange (CME) etc. - in India, they are largely traded on the Multi-commodity Exchange of India (MCX) as well as the National Commodity and Derivatives Exchange Ltd. (NCDEX).
Recent movement in zinc prices
In the past 12 months, zinc future prices have moved steadily and greatly. Zinc future prices for April 2022 rose to a high of ₹356/kg - but since then the price has seen drastic falls in most of the months and is currently at ₹277/kg with a lot size of 5.
China is the largest exporter of steel, hence the demand for zinc is greatly driven by the demand for zinc and overall economic conditions in China. India and Japan are distant third and second in steel production, however, the domestic industry is still a major customer indeed.
Impact on zinc stocks
Over the last year, the stock price of Hindustan Zinc Ltd. (the largest producer of zinc in India) has fallen by 9.2%, but it is looking to rally in the past few weeks. In the same period, the stock price of Vedanta Ltd. (which owns a 64.9% stake in Hindustan Zinc Ltd.) has seen a slight fall of 0.7%.
Conclusion
Now that you know about the basics of the zinc market, try finding out more about the other metals being exchanged on the commodity exchanges in India.
What to look for when investing in a commodity?
1. Using Moving Average for Commodity Trading
One of the most popular commodity trading strategies is the moving average. Moving averages are used by investors to identify and analyze market trends as well as support and resistance levels.
Demand and supply rules
Demand and supply have a profound effect on commodity trading. As the demand for an item increases, so does the price of that item.
However, commodity companies operate in a completely different way. Production is generally the same in every specific commodity industry. Cattle are cattle, and wheat is wheat.
As a result, not all manufacturers are price takers and generally cannot set prices.
Many commodity trading businesses are great examples of what is known as a fully competitive industry, with many consumers demanding homogeneous goods and providers failing to provide unique products.
Price fluctuations are caused by discrepancies between supply and demand, which can be caused by a variety of factors.
2. In Commodity, the lowest price wins.
Commodity companies are price takers who only compete on price. In general, successful industries produce at the lowest prices - they make the most profit per unit, and they can keep profits even when commodity trade prices are low.
Companies that produce at higher prices are the most vulnerable. If prices fall, they will not be able to make a profit, and if the market is not fast enough, they will have to close their doors.
Of course, if you are trading commodity prices, you should be wary of any one producer. However, if the supply is disrupted, the cost may increase.
3. Rising prices are often short-lived.
Commodity prices fluctuate a lot. This can be bad news for companies that make these products, as they can raise short-term prices or make it impossible for them to survive.
However, this volatility is not permanent and is a common factor in how commodity markets operate.
Supply and demand for goods remain constant due to over-correction due to price volatility.
If manufacturers do not respond quickly to price changes, supply will not grow fast enough to meet demand and prices will rise too much for consumers.
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