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At Least One Big Zinc Producer Is Preparing for an End to Surging Prices

Updated on
  • Hindustan Zinc locks in prices for some of its metals output
  • CEO says it’s ‘prudent strategy’ because of market volatility

Hindustan Zinc Ltd., a unit of billionaire Anil Agarwal’s Vedanta Ltd., has broken with its usual practice and hedged about a quarter of its annual metals production as prices trade near their highest level in years.

The company has locked in prices for 220,000 metric tons of zinc and 30,000 tons of lead, it said in an earnings statement on Monday. Zinc, used to galvanize steel for the auto industry, climbed to the highest in a decade this month and lead has risen to the strongest level since 2011. The decision to hedge was taken even as the company expects prices to remain elevated.

“We normally never hedge, but the volatility in the zinc prices was so high in the recent quarter that we decided it may be a prudent strategy to hedge a part of our production,” Chief Executive Officer Sunil Duggal said on a conference call. Zinc shortages will persist in the next few quarters, keeping prices at $3,000 to $3,500 a ton, he said. The metal was at $3,163 on Tuesday.

Zinc has soared 23 percent this year, extending a 60 percent jump in 2016, as cuts in global mine supply and China’s crackdown on pollution and mine safety created a shortage. Price swings have increased with the metal’s 60-day volatility near the highest level since June. Macquarie Group Ltd. said this month zinc may peak between $3,350 and $3,400 within six months.

The Udaipur, India-based miner said it hedged zinc at $3,084 a ton and lead at $2,418 a ton. About 165,000 tons of the forward sales were for the first quarter of next year and the rest for the following three months. Lead traded at $2,508 a ton on the London Metal Exchange on Tuesday.

“This is a sort of an exception we have done,” Duggal said. “I am not saying that we will not look at further hedging as prices increase.”

An increase of 3 percent in global zinc demand in 2017 and similar growth next year will probably keep the market tight and prices high in the short and medium term, Duggal said. Even if Glencore Plc restarts some of its shuttered mines or other operations ramp up, there will still probably be a supply shortfall, he said.

Read more: Glencore gets what it wants with zinc market tightest in years

Shares of Hindustan Zinc have jumped 23 percent this year after a 74 percent increase in 2016. Parent Vedanta Ltd. is up 55 percent in 2017 and added 1.4 percent on Tuesday.

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