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.

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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.

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.

Nyrstar Announces Strategic Hedging of Zinc Price

Nyrstar has entered into short-term strategic hedging arrangements to mitigate potential down side risks with respect to the price of zinc. The hedges are for approximately 70% of the free metal produced by the company’s metals processing segment — 8,000 metric tons (mt) of zinc metal per month — from September to the end of the first quarter of 2020. The collar structures implemented result in full exposure to a floating zinc price between $2,137/mt and $2,437/mt from September to the end of December. For Q1 2020, the collar structure results in full exposure to a floating zinc price between $2,100/mt and $2,457/mt. Thereafter, Nyrstar again retains full exposure at a price above USD 2,800/t.

“Nyrstar’s transformation and turnaround plan, announced in November 2020, targets balance sheet strengthening and portfolio restructuring with an exit from mining and a refocus of the company on its core metals processing segment and is sensitive to foreign exchange and zinc price movements,” said Bill Scotting, CEO, Nyrstar. “While we believe that the zinc price should continue to rise on the basis of improving supply and demand fundamentals and that the Euro should depreciate over the medium term against the U.S. dollar, we are prudently entering into short-term hedging arrangements to reduce downside risk to the company’s earnings as we execute the transformation plan.”

Belgian-based Nyrstar has mining, smelting, and other operations located in Europe, the Americas and Australia and employs approximately 5,000 people.

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