🔩️️ Your Guide To Investing In Zinc — A Metal Used Mainly As Protection Against Corrosion & Rust
You might know zinc as being one of the essential minerals that the human body needs. While this is true, zinc is also used to protect other metals (namely steel and iron) from rusting and corrosion through galvanisation, a process that involves coating said metal with zinc. The basic science behind it is that since zinc is more reactive than iron or steel, it will attract with the water and oxygen in the air first until it completely corrodes. This means big infrastructure builds like bridges can be continually maintained and protected against the forces of nature, a more cost-effective solution as opposed to replacing corroded parts. In any case, though galvanisation is the most common use case for zinc, there are also a number of other use cases with applications in various industries, such as cosmetics, aerospace, medicine & farming.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding zinc to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.
💰 Profit. As you can see from the price chart below, zinc has certainly undergone periods of volatility, providing opportunities for speculation and profit. At its peak, zinc reached almost $4,500 per tonne, compared to about $1,200 the year before. The interesting thing about this metal is that zinc stock levels monitored by the LME (London Metal Exchange) seems to be the biggest price driver over the years, which we will cover shortly. That being said, there are other factors that need to be taken into account since its applications are used in a number of industries. Generally, there are a number of trends that can act as support for zinc prices. These include a short-term deficit in inventory, growing Chinese and emerging market demand, as well as infrastructure demand. However, there are a number of risk factors that can put downward pressure on prices. These include substitution in response to rising prices, & a global recession that could weaken demand for the metal.
What Affects Zinc Prices
There are several key factors that are involved in moving the price of zinc:
- 🇨🇳 Chinese Production & Demand. Like with a number of other commodities, China is both the world’s biggest zinc producer and consumer, accounting for about 35% of the world’s supply, according to the USGS. Any disruptions in supply or demand in this country can have an impact on prices.
- 🌏 Global Economic Strength. Similar to other industrial metals, economic activity can affect zinc demand due to its applications. For emerging economies, improved industrialisation & urbanisation could certainly boost demand for zinc as they seek to invest in better infrastructure. For developed economies, countries may seek to improve or upgrade existing infrastructure systems, which could then boost demand for zinc.
- 🏛️Government Policy. Things like subsidies, tariffs, restrictions, and trade policies can definitely have an impact on zinc prices. For example, new investment proposals for infrastructure could certainly boost demand for zinc.
- 🔄 Substitution. Zinc faces a number of substitutes depending on the use case. Generally speaking, aluminium and plastic are major substitutes for various zinc products. So, if zinc prices rise higher than substitute prices, consumers may be incentivised to switch, lowering demand for zinc, and vice versa.
- 📈 Stock Levels. Unlike with other metals, stock levels arguably play a key part in moving zinc prices as it can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market. As seen in the price chart below, zinc stock levels and its price seem to have an almost-perfect inverse relationship.
- 🏷️ Production Costs. Input costs such as the cost of electricity, coal, and crude oil can have an impact on zinc ore extraction and refining into various zinc products. Furthermore, recycled scrap zinc metal can also impact prices as it adds to supply in the market.
What Is It Used For?
Most of the zinc produced is used as a galvanising material to protect other metals like steel and iron from corrosion & rusting, though there are some other use cases too, with applications in industries like cosmetics, aerospace, medicine, & farming. Below are some of its uses.
- 🌉 Galvanising Material. Zinc is most commonly used as a galvanising material, an anti-corrosion agent. Examples of items that are galvanised include fencing, bridges, street lights, hand rails, and metal roofs.
- 🎺 Alloys. Zinc can be combined with other metals to enhance and improve certain properties. Examples include brass (zinc mixed with copper) and nickel silver (zinc mixed with copper and nickel). Brass is used to make various musical instruments and hardware construction products.
- ⚙️ Die Casting. Die casting is the production of metal parts using moulds. Various industries (automobile, electrical & hardware) can use zinc as the metal for these parts.
- 💊 Medicine. You may be familiar with over-the-counter zinc supplements. Zinc is an essential mineral in the human body, and supplements can be used to treat zinc deficiency. More information about its role in human health can be found here, provided by the National Institutes of Health.
- 🏭 Other Industrial Uses. Several zinc compounds (zinc oxide, zinc chloride, zinc sulphide, etc.) are used to create a number of products, including paint, rubber, fungicides and fertilisers.
The Case Against Zinc
There are a couple of risks involved if you want to get involved with zinc. Firstly, in the short term, though zinc prices have recently rallied so far, should recovery from the pandemic be sidelined by a new, more resistant variant, further prolonging recovery and normalcy, this could disrupt not only mining operations, but also on the demand side. Secondly, as prices rise, the risk of substitution increases as the price disparity between zinc and its substitutes increases. This is because consumers may be incentivised to switch to zinc substitutes like aluminium if zinc prices rise too high, which will result in lowered demand, and therefore lower prices.
The Case For Zinc
Firstly, like other commodities, zinc can serve as a portfolio diversification tool & a hedge against inflation. In the short-term, stock inventories have been falling due to a supply deficit, which could partially explain why prices have been rallying recently. Overall, the main long term trend that can act as support for zinc prices is growing Chinese and emerging market demand. As China and other emerging economies continue to grow, urbanise and industrialise, demand for zinc could certainly grow as well. Similarly for developed economies, governments may seek to replace or upgrade old infrastructure systems with newer ones, which can certainly add to demand and act as support for prices.
Popular Ways To Invest In Zinc — Pros/Cons of Each
Here are some of the more popular ways in which you can invest in zinc. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Physical Zinc (Bullion Bars). You can buy and directly hold physical zinc bullion bars. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw zinc ore into finished bars tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices. Be sure to find reputable sellers for a greater degree of transparency in the sales process.
- Zinc ETFs. There are zinc ETFs that tracks zinc price movements through zinc futures contracts, which means you will have direct exposure to zinc prices. Nevertheless, these ETFs are traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your zinc. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
- Zinc Stocks. These are shares of companies that have exposure to zinc prices. There are no fees, apart from trading commissions depending on your broker. However, they don’t necessarily follow the price of zinc there are other factors that need to be taken into account, such as exposure to other metals, not just zinc. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
- Zinc Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell zinc at a specified time in the future with an agreed-upon price. Both the London Metals Exchange (LME) & the Chicago Mercantile Exchange (CME) offer these contracts, each representing 25 tonnes of zinc. These futures contracts are physically settled after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in zinc can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Similar to other commodities, zinc can be used as a portfolio diversification tool to spread your exposure to different kinds of assets. In the short-term, falling inventory levels suggest a supply deficit in the market, which could partially explain the recent rally in prices. Overall, the main long term trend that can act as support for zinc prices is growing Chinese & emerging market demand. However, as prices continue to rise, the risk for substitution increases as consumers are incentivised to switch. Lastly, as with a number of other commodities, a prolonged global recession could weaken demand for the metal as consumers cut back on spending.
🧺 If you are considering adding zinc to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your zinc position so you can take advantage of any volatility in the market.
💰 If you are considering adding zinc for speculation and profit, you may want to monitor the factors that affect zinc prices mentioned above. You may also want to keep track of the annual zinc publications provided by the USGS to identify supply and demand levels, along with other bits of information they provide. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on zinc’s price chart to help consolidate trends and patterns to help with your decision. That being said, its price can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.