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Zinc Futures - Meaning, Importance, and Methods to Trade

14 Mins 17 Mar 2023 0 COMMENT

Zinc—a galvanizing metal—is the most sought metal from the Iron industry as this metal protects Iron from becoming rust. It is the fourth most common metal in use after Iron, Aluminium and Copper. Zinc can be recycled infinitely, without loss of its physical or chemical properties. It is present in a wide variety of foods and is found particularly in association with protein foods.

It is a metal that has been used for thousands of years for various purposes, including coinage, electrical equipment, and as a component of alloys. In recent years, zinc has gained popularity as a commodity in the futures market. Today, it remains an essential component in many industrial processes, including the production of brass, zinc oxide, and various alloys. Because of its widespread use, the price of zinc can be subject to fluctuations based on supply and demand dynamics. Zinc futures are financial contracts that allow traders to buy or sell zinc at a predetermined price and delivery date in the future. This article will explore the meaning of zinc futures, their importance, and methods to trade them.

Of the total zinc produced, more than half of it is used to galvanize other metals such as steel or iron to prevent corrosion. Large quantities of zinc are used to produce die-castings, which are used extensively by the automotive, electrical and hardware industries. Zinc is also used as a chemical compound in rubber, ceramics, paints, and agriculture. Zinc coating is widely used to protect finished products ranging from structural steelwork for buildings and bridges to nuts, bolts, strips, sheets, wires, and tubes.

Global zinc consumption by first use

  1. Galvanizing – 54%
  2. Die-casting – 12%
  3. Rolled and extruded – 11%
  4. Brass – 10%
  5. Oxides – 10%
  6. Others – 3%

Global zinc consumption by end-use

  1. Construction – 51%
  2. Transport – 20%
  3. Infrastructure – 16%
  4. Industrial machinery – 7%
  5. Appliances – 6%

Mine production accounts for about 70% and the rest of the 30% come from recycling of secondary sources. Here also China is the world’s largest producer and consumer of zinc because of its industrial capacity as well as consumer demand, which dictate the global zinc market. International Lead and Zinc Study Group releases supply-demand data every month.

London Metal Exchange is the world’s oldest base metal exchange, which sets the benchmark for global zinc trading. London Metals Exchange offers forward trading in all base metals including zinc while other exchanges such as CME, SHFE and MCX offering futures trading. LME and MCX zinc market carry 97% of correlation as the Indian contracts are miniature contracts of LME forward contract.

Meaning of Zinc Futures

Zinc futures are a type of commodity futures contract that provides a way for traders to speculate on the future price movements of zinc. These contracts allow traders to lock in a price for the delivery of zinc on a specific date in the future. This means that if the price of zinc increases, traders who have bought futures contracts can sell the zinc at a profit. Futures contracts are traded on various commodities exchanges around the world, including the London Metal Exchange (LME), the Shanghai Futures Exchange (SHFE), and the Multi Commodity Exchange of India (MCX). These exchanges provide a platform for buyers and sellers to trade futures contracts, allowing them to manage their price risk and speculate on market movements.

Importance of Zinc Futures

Zinc futures are important for several reasons. Firstly, they provide a way for producers and consumers of zinc to hedge against price fluctuations. For example, a zinc producer can sell zinc futures contracts to lock in a price for the zinc they will produce in the future. This helps them to reduce the risk of selling their product at a lower price than they had anticipated. On the other hand, a consumer of zinc can buy zinc futures contracts to lock in a price for the zinc they will purchase in the future. This helps them to avoid paying a higher price for zinc than they had budgeted for.

Secondly, zinc futures are important for speculators who are looking to make a profit from price movements in the zinc market. Speculators can buy or sell zinc futures contracts based on their expectation of future price movements. If they believe that the price of zinc will increase, they can buy futures contracts. Conversely, if they believe that the price of zinc will decrease, they can sell futures contracts.

Methods to Trade Zinc Futures

There are several methods that traders can use to trade zinc futures. Some of the most common methods include:

  • Speculation: This involves buying or selling zinc futures in an attempt to profit from price movements. Speculators may use a variety of technical and fundamental analysis techniques to inform their trading decisions.
  • Long Position: This involves buying zinc futures contracts with the expectation that the price of zinc will increase. Traders who take a long position make a profit when the price of zinc increases.
  • Short Position: This involves selling zinc futures contracts with the expectation that the price of zinc will decrease. Traders who take a short position make a profit when the price of zinc decreases.
  • Hedging: This involves using zinc futures to offset the risk of price movements in an underlying physical position. For example, a producer of zinc may sell zinc futures to hedge against a fall in the price of the metal.
  • Spread trading: This involves buying and selling two related futures contracts simultaneously, with the goal of profiting from the difference in their price movements. For example, a trader might sell a contract for the delivery of zinc in one month while simultaneously buying a contract for the delivery of zinc in another month.
  • Options Trading: This involves buying or selling options contracts that give the trader the right, but not the obligation, to buy or sell zinc futures contracts at a predetermined price. Traders who engage in options trading aim to profit from the price movements of zinc futures contracts.

Regardless of the method used, it is important for traders to have a clear understanding of the risks involved in trading zinc futures. The price of zinc can be subject to significant fluctuations, and futures trading can result in substantial losses as well as gains. It is recommended that traders seek the advice of a professional before entering into any futures trading activity.

Contract specification – Zinc Futures

 

Zinc

Contract Size

5 MT

Quotation base

Per Kg

Delivery Unit/

Delivery

5 MT

Delivery Logic

Compulsory, if the position on contract is open during the staggered delivery period

Expiry date

Last Day of Calendar Month

Initial margin

(subject to change dynamically)

Minimum 8 % or based on SPAN whichever is higher

Extreme Loss Margin

Minimum 1%

Contract specification – Zinc Options

Parameters

Zinc

UNDERLYING

MCX Zinc Futures Contract

Expiry Day

(Last Trading Day)

8 business days prior to expiry of underlying

Underlying Quotation / Base Value

Rs. / Kg

Underlying Price Quote

Ex-Warehouse Thane

Strikes

7 In-the-Money (ITM), 1 At- the-Money (ATM) and 7 Out-of-the-Money (OTM) strike prices

Strike Price Intervals

Rs. 2.50

Tick Size

(Minimum Price Movement)

Rs. 0.01

Daily Price Limit

The upper & lower price band shall be determined based on statistical method using Black Scholes option pricing model and relaxed considering the movement in the underlying futures contract.

Settlement

Same as that of Options on other commodity futures

 

Conclusion

Zinc futures are an important tool for producers, consumers, and speculators to manage risk and make profits in the zinc market. Understanding the meaning, importance, and methods of trading zinc futures is essential for anyone who is interested in participating in this market. However, it is important to remember that trading in zinc futures, like all forms of investing, involves a degree of risk. As such, it is essential to educate yourself thoroughly before entering the market and to seek professional advice if necessary.

 

ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.