SINGAPORE/MUMBAI (Reuters) - Tighter supplies and rising premiums for zinc in India are spurring users and small, local trading houses in Asia’s third-largest consumer to scout overseas for the metal.
Fuelling the rise in premiums is a move by the world’s No. 1 refined producer, Korea Zinc (010130.KS), to scale back its expansion plans in India due to stiff price competition from Hindustan Zinc (HZNC.NS), which holds a near-monopoly on the market.
The retreat by Hindustan Zinc’s top rival shows how tough it is for foreign firms to crack the Indian market and illustrates the domestic titan’s aggressive tactics to defend its home turf as it aims to grow sales in an already oversupplied market overseas.
“The availability is very low due to lack of supplies from Korea Zinc... Korea are out of the market this year,” Sandeep Daga, director at Mumbai-based Regsus Consulting, which advises base metals companies, said of the Indian market.
Zinc premiums in India have climbed to about $150-$200 a tonne from $80-$100 at the start of March. Several traders in Singapore noted a flurry of enquiries for global inventories monitored by the London Metal Exchange. Premiums are paid on top of LME cash zinc prices to obtain the metal.
“Hindustan Zinc increased premiums by about $50 in the Indian domestic market for zinc....in the last two weeks,” a Singapore-based trader said last week.
Hindustan Zinc is majority owned by London-listed Vedanta Resources (VED.L) and is minority owned by the Indian government. It is the world’s third-largest producer of refined metal.
A Korea Zinc spokesman said he had no knowledge of the company curbing sales to India.
The impact on overseas zinc markets, however, has been limited so far, with Indian consumers reluctant to pay higher international prices.
“If you want to buy zinc, you can get it at $180 in warehouse Singapore but no one is going to pay. Customers.. are not going to pay anything higher than $165,” said a second trader based in the city-state, referring to prices that include insurance and freight costs.
Zinc, used mainly to galvanise steel, attracts a 5 percent import duty in India, although this can be offset by rebates, in some cases of 2-3 percent.
Korea Zinc supplies about 2,000 tonnes per month of the metal to India and had aspirations to grow that figure to 20,000 tonnes per month this year, traders said.
But Hindustan Zinc, which supplies 85 percent of India’s annual requirement of roughly 640,000 tonnes of the metal, offered zinc at far lower premiums to some users, in a move to protect its backyard.
“They (Korea Zinc) were offering material at $135, but Hindustan offered zinc at $20-$30 because they wanted to keep them out of the market,” the second trader said, citing one example.
Indian end-users tend to buy cargo on credit terms from suppliers, with up to 90 days for payments, and Hindustan Zinc has told them those credit terms can be reviewed if they have been getting metal from other suppliers, traders said.
A Hindustan Zinc spokesman said that its premiums are market driven and that its pricing is in line with the market.
The global market for zinc is expected to be in a 180,000-tonne surplus this year, according to a poll of analysts by Reuters. The surplus and expectations for slowing demand growth helped to push zinc prices to a five-month low last week.
India and South Korea cumulatively consume about 1.2 million tonnes of zinc a year, according to investment bank Macquarie. That is just a tenth of global market consumption and far behind top consumer China, which analysts expect to use about 6 million tonnes this year.
Both Hindustan Zinc and Korea Zinc produce more than domestic demand warrants and must therefore seek markets for the metal outside their shores. (See table below for comparison between the two companies)
Traders said Korea Zinc could have been worried that its strong position in Southeast Asia could come under threat from Hindustan Zinc, given the Indian firm’s ample supply. The Hindustan Zinc spokesman said Southeast Asia was a natural destination for the firm “due to geographical proximity”.
Also, Vedanta’s stockpile of zinc, after it bought Anglo American Plc’s (AAL.L) zinc assets in 2010, could be looking for a new home, given a declining European market and global glut of metal, traders said. The Korean firm may therefore have chosen to make a tactical retreat from India to protect its Southeast Asian sales, they said.
“The Koreans have been very smart. They know with the Anglo material coming in that Hindustan Zinc could attack Southeast Asia very aggressively,” the first trader added.
Additional reporting from Meeyoung Cho in SEOUL; Editing by Muralikumar Anantharaman