ZINC BULLS YET TO ARRIVE

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1 ZINC BULLS YET TO ARRIVE When the metals community last descended on London for LME Dinner 2005 zinc was every analyst s favourite pick of the bunch for out-performance in 2006 and they weren t wrong. The CTA systematic fund community and the index funds were joined by a rush of hot money in pursuit of what looked like a one-way ticket to sizzling returns on the industrial metals. Those hot investment dollars have since ebbed away from the metals since that May orgy in a series of reverse flows resulting from a rising global interest rate environment no more cheap money on which to leverage commodity plays a falling oil price, deteriorating sentiment about global growth and the near collapse of the Amaranth hedge fund. The black-box CTAs are still in there as is the drip-drip of pension fund money being allocated for risk diversification into commodities. And zinc is still every analyst s pick of the bunch for performance in Reasons for the Metal to Shine Copper, which led the pack creating new heights in this part of the cycle, at this stage looks dangerously wobbly at its elevated heights, even if so far it hasn t actually broken lower. The Sentiment in aluminum has been undermined at every rise of it the collapse in the alumina raw material price and by a negative chart picture. When I look at zinc I can definetly say that the zinc masses are still to arrive. In this chart it becomes absolutely obvious as a layman about the direction of this commodity

2 If one looks at this chart one can analyze that the inventory in the form of LME stocks fell by 235,000t last year and is down by 260,000t so far this year, indicating that the prices can skyrocket with such low levels of inventory. Global demand is expected to increase by 3.9% to million tonnes this year and by another 2.6% to million tonnes next year. China will be an increasingly important driver of that growth rate with demand in the country expected to rise by 4.7% in 2006 and by 6.9% in 2007, at which time China will account for 30% of total world zinc usage. Demand in both the US and Europe is forecast to be flat next year after growth of 7% and 3.4% respectively in World mine production is forecast to register only very modest 2.1% growth this year to reach million tonnes. But a combination of re-openings, expansions and new mines will see that growth rate accelerate to 7.3% in 2007, when it will total million tonnes. Refined metal production will rise by 4.3% in 2006 and by 4.9% in 2007, primarily due to expansions in China. Exports from the CIS region are forecast to rise as production is expanded. Sustained production-consumption deficit continues to eat away those stocks and mitigate against price weakness.

3 Zinc seems set on a linear path towards critically low stock levels and the sort of technical market tightness experienced by both nickel and copper in the recent part of the cycle. Reasons for the Metal to Fade But is it really the one-way bet that is commonly assumed? I still have certain doubts on this as there are three important caveats I must present. Firstly There is little doubt that the US economy is already slowing and that will send a ripple effect through the global economy. This will be a period of slowing growth rather than recession; it has implications for demand for all the base metals. Secondly China has de-stocked heavily of the latter two and will have to come back to the Western market in the form of higher imports at some stage soon in the cycle. China has twice this year flipped back to monthly net exporter. It has been able to do so, it seems, because its refined production growth has doubled to 14% so far this year. By August the country had produced an extra 260,000t of metal relative to August Domestic mined production is growing at an even faster pace than the refined metal growth and there is a suspicion that the official figures are not capturing even faster growth in the small unofficial sector. Thirdly The zinc concentrates market has been extraordinarily tight for some time now and has brought with it casualties such as the Big River zinc refinery in the US, which was closed earlier this year due to lack of raw materials. Big River Zinc has been bought by ZincOx which intends to resume production using EADF feed. Significant rises are also anticipated in Kazakhstan and the Republic of Korea. New mines and restarts have only just begun to kick into the supply-demand equation but they will gather momentum over the next 12 months. China s net imports of refined zinc both this year and next will decrease thanks to better concentrates availability and rapidly expanding smelter capacity.

4 OUTLOOK After analysing the above information World refined zinc market to remain in deficit in both this year and next. This itself is another bull signal. The extent of the shortage in 2006 is estimated at 354,000 tonnes, narrowing to 154,000 tonnes in Zinc a one way bet.. Zinc is the only commodity in this bear phase of the commodity market has stood against all odds, with gold, crude and tumbling and other commodities having the same spillover effect, I would say that zinc has been as clean as ever with limited falls taking place in it. I would strongly recommend buy for this commodity but for those who have the capacity to hold it during the phase when it corrects to some extent. For the brave who can dare to hold this commodity will be benefited two folds as inventories keep sliding in just one direction (down) and prices just moving in one direction (up) In the drama and action the real hero according to me is zinc as it seems to be in no mood to leave the party right now. And we thought there was no such thing as a oneway bet in the financial markets TECHNICAL COMMENT Zinc Oct Has Wedge Pattern Break Out Above , Which Can Give 25 Rs. Up Move From Buy Mcx Zinc Oct Above For Target Of 172, 178, 184, 189 With Stop Loss Of 160, 154

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