Hedging Against Rising Zinc Prices using Zinc Futures

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Zinc Price

Most people these days are undoubtedly more health-conscious, and that’s why many recognize zinc as an essential mineral especially during pregnancies. But it actually offers a wider range of applications than most people suspect.

You may be surprised to know ores with this metal have been used for thousands of years, mainly as part of brass. Zinc ores with coppers were smelted by the Romans, and metallic zinc was produced in India as early as the 1300 AD. Europe had to import the material from the subcontinent. Finally, the Europeans found a commercially viable way to extract the metal from a charcoal and calamine mixture in 1852.

Below is the historical Zinc price per metric ton.

Year Price Price (Inflation Adjusted) Change
1980 $760.96 $2,345.63 0%
1981 $845.84 $2,363.80 10%
1982 $744.80 $1,959.92 -14%
1983 $764.45 $1,949.25 3%
1984 $921.90 $2,253.81 17%
1985 $783.38 $1,848.62 -18%
1986 $753.98 $1,746.06 -4%
1987 $798.07 $1,783.94 6%
1988 $1,240.28 $2,663.23 36%
1989 $1,656.22 $3,393.49 25%
1990 $1,517.92 $2,950.78 -9%
1991 $1,121.36 $2,092.02 -35%
1992 $1,241.84 $2,249.31 10%
1993 $963.96 $1,695.14 -29%
1994 $998.22 $1,710.90 3%
1995 $1,031.09 $1,719.10 3%
1996 $1,024.98 $1,659.14 -1%
1997 $1,314.90 $2,080.58 22%
1998 $1,024.29 $1,595.22 -28%
1999 $1,075.80 $1,639.38 5%
2000 $1,127.70 $1,661.96 5%
2001 $886.82 $1,271.36 -27%
2002 $778.90 $1,099.06 -14%
2003 $827.97 $1,142.03 6%
2004 $1,048.04 $1,407.58 21%
2005 $1,380.55 $1,793.19 24%
2006 $3,266.18 $4,110.87 58%
2007 $3,249.73 $3,978.76 -1%
2008 $1,884.83 $2,223.19 -72%
2009 $1,658.39 $1,963.95 -14%
2020 $2,160.36 $2,518.12 23%
2020 $2,195.53 $2,479.76 2%
2020 $1,950.02 $2,157.17 -13%
2020 $1,910.17 $2,081.86 -2%
2020 $2,160.97 $2,318.11 12%
2020 $1,931.68 $2,070.08 -12%
2020 $2,089.98 $2,189.36 8%
2020 $2,664.81 $2,728.77 22%
2020 $2,573.40 $2,573.40 -4%

Price History of Zinc

Historically, zinc prices flowed and ebbed without much volatility since the 1960s, although the price gradually went up through the years. That changed in about 2006 or so, when the price to more than $4,500 per ton. That was a short-lived spike due to supply problems, and the supply stabilized again in 2009. Since then, the prices went through its usual ups and downs depending on the supply and production. Prices were low in 2020, and in mid-January of 2020 it hit $1,460 per ton which is the lowest in 7 years. But since then as of the first week of March 2020, the price has climbed 25% and is sitting near $1,797 per ton.

The price is all about the supply for the most part, and it is driven by speculation as to whether more mines will close or if other mines will increase production if the price goes too high. But demand for the metal is steadily increasing in light of economic growth and increased industrialization.

The consensus among experts is that the price will average at about $1,731 in the last quarter of 2020. By the end of 2020, they anticipate an average price $1,978 per ton.

Zinc as Investment

You can trade futures contracts in the London Metal Exchange under the contract code ZS. Lot sizes are 25 tons, with at least 99.995% purity. You can only use the US dollar, the British pound, the Japanese yen, and the euro as currencies.

You can also buy shares in companies with a significant exposure to zinc, accounting for at least half the earnings. Some are mining companies, but these are often huge diversified mining companies that deal with other metals.

Finally, you can also buy shares in exchange-traded funds, but often these deal in numerous commodities as well, and not just in zinc.

Purposes Used For

The most common use of metallic zinc is for galvanization. About a third of this metal around the world is for this purpose, and in the US 55% of the metal is reserved for this process. In galvanization, a protective coating of the metal is applied to any item that’s prone to corrosion, such as iron or steel. Usually this is done through an electroplating process, but it can also be as simple as just dipping an iron nail in a pool of molten zinc.

It’s not that the zinc is especially corrosion-resistant. It’s actually more reactive than iron and steel, so it attracts all the local oxidation to the metal which leaves the iron or steel safe. In addition, as the metal corrodes it forms a layer of oxide and carbonate to protect the steel or iron.

This tendency to attract oxidation away from other materials makes it useful as a sacrificial anode in cathodic protection. The galvanic anode can protect a buried pipeline, and it’s also used to protect ship parts from sea water corrosion. A disc of the metal is attached to the iron rudder of a ship so that the rudder remains unscathed as the zinc slowly corrodes. The metal is used the same way for the propeller and for the keel of the ship. It’s also used as anode material for many types of batteries, including alkaline batteries.

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It’s also used to make alloys. It’s one of the ingredients of brass, which is stronger and more ductile than copper, and also is more corrosion resistant. These qualities make it useful for water valves, communications equipment, musical instruments, and other hardware.

With lead and tin, the alloy results in solder. This is a metal with a very low melting point which makes it ideal for joining electrical parts and other metallic components.

As an oxide compound (ZnO), it is used in paints, batteries, plastics, cosmetics, soap, pharmaceuticals, printing inks, and some rubber products. As a sulfide compound (ZnS), it glows in the dark when exposed to UV light, electrons, or X-rays, which makes it useful for fluorescent light, TV screens, and luminous watch dials. And as a chloride compound (ZnCl2), it even protects wood from decay and insects.

As you can see, zinc is a crucial component in construction and in the electronics industries. You’ll see a greater demand for it as emerging markets focus on increased industrialization.

Zinc Outlook 2020: Market Facing Downside Risks After Flat Year

What’s the zinc outlook for 2020? Experts and CEOs share their thoughts on what’s ahead for the base metal next year.

It was another disappointing year for zinc bulls, with prices ending 2020 at almost the same level as when the year started.

Following a rally in Q2, prices performed in a downward trend for most of the second half of 2020.

With the year now almost over, the Investing News Network (INN) caught up with analysts, economists and executives from mining companies to find out what’s ahead for zinc supply, demand and prices.

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Zinc outlook 2020: The year in review

Zinc reached its highest level of the year in April, when it broke the US$3,000 per metric ton mark.

According to FocusEconomics economist Javier Colato, the April spike in pricing happened primarily due to tightened supply.

“Zinc prices trended upwards through April mainly as a result of supply constraints,” Colato told INN.

“Stockpiles of the base metal at London Metal Exchange (LME) warehouses fell to their lowest levels in over two decades during this period, while inventories at the Shanghai Futures Exchange also remained historically low. … Furthermore, Chinese production remained subdued, largely reflecting stricter environmental regulations faced by smelters, thus accentuating the supply shortage in the market.”

One of the key trends in the zinc market this year has been the recovery in Chinese refined zinc output, according to CRU Group Senior Analyst Helen O’Cleary.

“We also expected mine supply to significantly pick up ex-China,” she said. “But due to underperformance at a number of operations due to technical reasons, strikes and community issues, together with slower ramp ups than expected at a number of major projects and a few price-induced closures, the increase in mine supply this year has been lower than expected.”

Earlier this year, Wood Mackenzie Research Director Chris Parker told INN that smelter production is the “key element” in zinc supply and demand.

“For the last seven years, annual global zinc consumption has been met in full only with a drawdown of exchange and unreported stocks,” he said. “Refined inventory is now very low; there is little scope for further substantial drawdown and consumption can only be met by increased smelter output.”

The trade war made 2020 a tough year for most base metals, as weak global and domestic demand weighed on industrial activity in China.

“Moreover, prospects of rising global mined output have further supported the bearish sentiment among market participants, despite low stockpiles at the LME warehouses, which have supported prices in recent months,” analysts at FocusEconomics said in their latest report.

It was also a disappointing year for junior miners, which found it challenging to get investors interested in base metals.

“We do believe that the tide is turning and that the interest in commodities is growing,” Patrick Soares, president and CEO of Foran Mining (TSXV:FOM), said. “Smart investors are making investments now and (are) positioning themselves for the next few years.”

Brandon Macdonald, CEO and director at Fireweed Zinc (TSXV:FWZ), expected a modest improvement in the space in 2020 given dwindling inventories.

“However, I was proven incorrect as sky-high spot treatment charges and a soft price for physical metal meant reduced investor interest,” he said.

Learn more about the zinc market this 2020

Read our updated outlook report now!

Echoing his sentiment was Peeyush Varshney of ZincX Resources (TSXV:ZNX), who said there was a complete lack of interest by the investor community this past year.

“As always, however, in due course this changes, and bull markets are created again in the resource sector,” he said. “So there is an opportunity right now to buy shares in very high-quality junior exploration companies at bargain prices — in anticipation of very high returns once the sentiment changes positive.”

Zinc outlook 2020: Mine supply up, demand down

As 2020 comes to a close, CRU Group still expects a concentrate surplus this year after ex-China refined zinc output underperformed for a variety of reasons. Additionally, the refined market is expected to remain in deficit despite weaker-than-expected demand.

“Next year we expect both concentrates and metal to be in surplus due to a significant increase in mine supply and continuing weak demand,” O’Cleary said.

For the expert, record-low LME stocks had the biggest single impact on price and spreads this year, pushing zinc’s price into backwardation for most of the year. This has skewed market fundamentals and made the physical market look tighter than it is.

“Investors should keep eyes on the Chinese (arbitrage) in the new year — if this becomes positive for exports from China then it will be very bearish for prices,” she said. CRU Group forecasts that zinc will average US$2,180 next year.

O’Cleary also suggested that investors watch the ramp up of New Century Resources’ (ASX:NCZ,OTC Pink:NCRE) New Century tailings operation; Vedanta’s (LSE:VED) Hindustan and Gamsberg zinc operations; potential community issues at the Peñasquito mine, which could have a significant impact on production; and any delay in the restart of American Zinc Recycling’s Mooresboro smelter, which could exacerbate regional tightness to the US refined market.

In terms of price, FocusEconomics analysts expect zinc to gain some ground amid continued low inventories in the global market.

“However, muted global industrial production and an uncertain economic backdrop remain key downside risks to the outlook,” they said.

Analysts polled by the firm see prices rising mildly by the end of next year, averaging US$2,391 in Q4 2020. They see prices climbing further in 2021, averaging US$2,415 in Q4 of that year.

Zinc outlook 2020: Execs suggest positioning now

Looking ahead, Foran’s Soares expects a slow rise in interest in base metals, driven by fiscal spending by governments in the developed world.

“2020 is going to be the start of a new secular bull market for commodities,” he said. “The next decade is going to see large investment in the base metals space.”

His best piece of advice for investors new to the industry is to take advantage of the zinc and copper spaces with initial investments in the zinc and copper producers, where returns could hit double digits.

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“The next tier where investors should position themselves is with companies such as Foran, which are developing zinc-copper deposits,” he said. “Here the potential returns are multiples of their investment.”

Foran Mining is currently focused on advancing its flagship asset, McIlvenna Bay, to production.

Adding explorers to one’s portfolio is also possible, but investors need to choose carefully, he added.

Meanwhile, ZincX’s Varshney said investors should look for companies that have significant deposits that would be of interest to mid-tier and major mining companies.

“So the deposit should be large-scale, high-grade, in a good mining jurisdiction and have significant exploration potential (further upside). If a project doesn’t have all of these things, in all likelihood it won’t be of interest to a major mining company, and most likely the project will never be developed.”

After putting out a maiden preliminary economic assessment last year, Varshney said his company’s flagship Akie property is now being looked at by several mining groups as a potential development asset.

For his part, Fireweed’s Macdonald said 2020 could be a mixed year for zinc.

“On the one hand, we may see a supply surplus of physical metal, which is bearish, but on the other hand, some producers are teetering on the edge of oblivion even at these prices,” he said. “If that surplus leads to a price reduction, which leads to mine closures, it could be interpreted as a bullish sign and a new floor in pricing.”

He suggested investors tune out the noise of daily and even monthly price movements and reflect instead on long-term consensus and the availability of quality projects.

“Dwindling inventory is a problem that can be pushed out only so long,” he added.

Fireweed is developing the Macmillan Pass project, and, due to some recent results, there is potential for a resource expansion.

Don’t forget to follow us @INN_Resource for real-time news updates.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Fireweed Zinc and Foran Mining are clients of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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Hedging Against Rising Zinc Prices using Zinc Futures

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