On LME, zinc prices surged 5.6% this week
On LME, zinc prices surged 5.6% this week

Rising zinc prices can bring limited benefits to Hindustan Zinc shares

  • Zinc usage is estimated to exceed production this year as well, notwithstanding the demand softness in China
  • China is a large user of zinc, accounting for nearly half the global demand

Price adjustments in commodity markets can be dramatic. Zinc prices increased to an eight-month high on the London Metal Exchange (LME) this week. For three consecutive years, zinc demand exceeded supply, depleting its inventory. Supplies are projected to rise this year. However, low inventories ahead of the purchase season has triggered an increase in zinc prices.

On LME, zinc prices surged 5.6% this week. This calendar year, the price is up 14.8%. Zinc usage is estimated to exceed production this year as well, notwithstanding the demand softness in China.

China is a large user of zinc, accounting for nearly half the global demand. Environment regulations have crimped production in China. Output in India is also falling, and the rest of the world has limited spare capacities. “Despite the additional mined metal, a deficit of 72,000 tonnes is expected in 2019, which would support prices," Antique Stock Broking Ltd said in a note.

These price trends will aid Hindustan Zinc Ltd (HZL), a large producer of the metal in India. Tracking the 8% rise in LME prices last month, HZL’s stock price gained 11%. Though tight market conditions should bode well, one cannot be assured that the price rise will sustain. Gains in the stock, however, can be limited unless the zinc market deteriorates, which will benefit producers.

HZL has limited leeway to improve zinc production. Closure of open cast operations at a key mine is limiting raw material supplies. Refined zinc production is down 11% in the first nine months of FY19. To make up for the shortfall, the company is ramping up underground mining operations. It even lined up capital expenditure to expand its capacity. But execution has been lagging and the investments are expected to yield benefits after a year or so. Hence, zinc production growth can be muted, aver analysts.

In addition, the premium valuations are not helping. The HZL stock trades at 12.8 times one-year forward price-to-earnings multiple. This is higher than global peers barring Korea Zinc Co. Ltd, shows data collated by Antique Stock Broking.

Continuing uncertainty about the global economy means investors would do well to exercise caution and await a capex-led ramp-up in production.

“In 2019, zinc deficit may witness positive surprise from higher-than expected increase in Chinese refined production and a pickup in infrastructure spending, which constitutes 23% of zinc demand. Negative surprise may be witnessed from weaker auto demand, which constitutes 11% of zinc demand, and a deterioration in the global economy," analysts at JM Financial Institutional Securities Ltd said in a note.

Close