Zinc is a bullish exception among bearish metals

The current three-month LME price of zinc is up around 50% on the January level. But, it is still miles away from the lofty high of $4,580 a tonne in November 2006. Lead made it to the peak at $3,890 a tonne a year later in October 2007

Nature has willed that zinc and lead will be found in the same deposits, as we see in India. Naturally, the two minerals are mined more often than not in tandem. The metals emerging from the minerals after smelting and refining are, therefore, described as "two sisters". On a structural supply deficit caused by some big mines, closure and consequently fall in zinc production, the metal, used principally for galvanisation of steel, remains one of the two best performers on the London Metal Exchange (LME).

The other is nickel, used in making stainless and alloy steels. Unlike zinc, where both mining capacity and metal production in India are continuously rising since Delhi began disinvestment in Hindustan Zinc Limited (HZL) in April 2002, the country is wholly import-dependent on nickel. Since disinvestment, the company, now a subsidiary of Vedanta Limited, with the government still owning 29.5 per cent, has raised its metals production capacity to one million tonnes (mt) from 200,000 tonnes, and mining capacity to 10.25 mt from 3.45 mt. No wonder, proponents of reforms within and outside the government cite the example of HZL to underline what disinvestment could do to 'value discovery' in public sector undertakings.

What will continue to favour HZL is zinc remaining a bullish exception in a sea of bearish forecasts for most other base metals. For Goldman Sachs and many other consultancies and investment banks, the favoured metals are zinc and nickel. No doubt, both metals have made impressive progress since the beginning of this year. The current three-month LME price of zinc is up around 50 per cent on the January level. But, it is still miles away from the lofty high of $4,580 a tonne in November 2006. That was the zinc supercycle peak. The other sister, lead made it to the peak at $3,890 a tonne a year later in October 2007.

"You have to leave it to the market to set prices at any given point. So many factors combine to move the market one way or the other. I have no control over prices. My focus, therefore, is to improve HZL's cost competitiveness on a continuing basis. The other work I consider important is to raise the awareness in government and industry of usefulness of intensive zinc application in steel galvanisation. That apart, our crop productivity and farm income will rise if zinc deficiency of cultivable land is removed. Zinc deficiency in our nutrition also remains a major concern," says Anil Agarwal, chairman of Vedanta Resources, ultimate owner of Vedanta Limited. Research and consultancy firm Wood Mackenzie says with cash costs of around $800 a tonne, HZL figures among the world's more efficient producers. The best way to fight corrosion, which inflicts annual losses estimated at four per cent of the country's gross domestic product (GDP), is to galvanise every tonne of steel put to use in construction, house building and automobiles. Whatever the quality of 'naked' steel, it reacts in contact with water through a slow way of oxidation. In the beginning, layers of a substance of red and brown colour are formed on the metal surface followed by corrosion within. Galvanisation could be done either with zinc or tin, both ideal for coating. But, globally, the preferred coating material is zinc.

In the post-disinvestment years, HZL has aggressively pursued the goal of finding new zinc and lead resources through exploration of areas contiguous to its existing mine sites and at previously unexplored centres. So far, the company has succeeded in adding to its kitty a lot more by way of reserves and resources (R&R) than minerals mined. HZL CEO Sunil Duggal says: "Since Vedanta took charge of HZL, accretion to R&R is 290 mt against our taking out 73 mt from captive mines."

A highly favourable R&R accretion ratio, the HZL experience once again proves the point that more intensive the prospecting and exploration, greater will be the discovery of the country's mineral resources. Agarwal says HZL production cost will be further trimmed as it moves from open cast to underground mining requiring application of technology from South Africa. Shaft mining at the company's two major mines Sindesar Khurd and Rampura Agucha in Rajasthan are due to start in 2018 and 2019, respectively. Agarwal has also mandated that in the next two to three years "every ounce of metal to be made by HZL must be at par with the best in the world".