Remember when Barack Obama defeated republican presidential nominee Senator John McCain? Or Usain Bolt’s first appearance in the Olympic games? Well… that’s how far back you need to go if you want to see zinc prices as high as they are now.
Last week, zinc closed just short of $2,300 per metric ton on the London Metal Exchange, the highest level since early 2008. Zinc is the first industrial metal we can say that about (and possibly not the last one).
Zinc hits an 8-year high. Source: MetalMiner analysis of Fastmarkets.com data.
Zinc markets moved into deficit this year following the shutdown of some big mines. The International Lead and Zinc Study Group (ILZSG) anticipates that global usage in 2016 will exceed production by 349,000 mt. In 2017, the market is expected to remain in deficit with the extent of the shortage forecast at 248,000 mt.
How our subscribers bought zinc this year. Source: MetalMiner analysis of Fastmarkets.com data.
Whether fundamentals justify zinc’s spectacular rally or not is debatable. What’s not debatable is that there is no way you can time your purchases by just looking at the fundamentals. You need to understand how prices move, or have someone do it for you.
The first thing you need to know is what kind of market you are in. Are you in a bear market or a bull market? Industrial metals were in a bear market since 2011 until they hit a floor in January. Since it’s impossible to consistently pick the exact market bottom, we always recommend to hedge when prices are finally showing strength.
That happened back in April, when we saw enough evidence to call a bull market in industrial metals. At the same time, zinc prices were consolidating after rallying in the first quarter. Then, zinc managed to break out of that price consolidation. Given zinc’s bull narrative of supply shortfall, a confirmed bull market in industrial metals and zinc’s strong price action, we recommended our subscribers to buy one year worth of demand on the first of May, when prices were trading at $1,900/mt.
Then, Zinc prices continued to move higher but, since the future is always unpredictable, you can’t just buy at any price. Markets can always turn the other way around and you don’t want to buy large quantities just before markets turn around. Therefore, you need to wait for another strategic point to hedge/buy forward again.
That happened again on the first of November. The bullishness across the metal complex became more and more obvious and zinc prices broke out from another consolidation, confirming that there was a high probability that prices would move higher. On the first of November, we recommended our subscribers to buy six-months forward when prices where at $2,420/mt.
Bottom Line
Zinc buyers that followed our strategy will be buying zinc in 2016 at an average price of $1,830/mt. Those that simply bought month by month will pay and average of $2,080/mt, or 13% higher. Moreover, those that followed the strategy will have locked in their purchase requirements for 2017 at an average price of $2,160/mt while the others will enter 2017 with quotes near $2,900/mt.
What This Means For Metal Buyers
Zinc prices might look expensive, but they still look strong and could continue to move higher. Buyers need to pay attention to capitalize on future strategic points to hedge/buy forward. On the other hand, if markets turn around, buyers need to identify those turning points to start buying down the market.