ZINC TODAY: Price weakness will prove to be transient

Analysis

• Zinc is experiencing some downward pressure because selling orders are growing as prices move toward $3,000 per tonne. But zinc prices remain above its 20 DMA and its 50 DMA, which could suggest that sentiment is still friendly. In this context, we may retain our constructive stance over the very short term as long as key support at $2,650 per tonne is not breached on a daily closing basis.

• Looking at our monthly chart, we continue to see a bullish breakout pattern. Zinc seems to be attracted by the 50% Fibo of the 2006-2008 downtrend. A close above it may suggest that the bull market will continue over the coming months.

• On the upside, zinc needs to take out the 2016 high to make sure the uptrend will last longer. On the downside, we will pay close attention to its key support, a break of which may trigger further selling pressure towards the long-term 150 DMA, which is likely to determine the sustainability of the uptrend.

Macro drivers

LME zinc is down nearly 2% since the start of the week alongside most of its peers as investors scale back their reflation-oriented trades on waning optimism over US president Trump’s capability to boost the economy.

Worryingly, the sell-off in LME zinc prices since Monday has been driven by increasing trading volumes, signalling strong conviction from market participants to cut their long positioning in zinc.

The LME spec positioning in zinc was little changed over March 10-17 while zinc prices rallied strongly by nearly 7% over the same period. This is positive in that it suggests that last week’s rally was not purely speculative-driven; rather it was supported by tighter fundamentals.

The tightness in the concentrate market has become extreme, judging by spot TCs reaching their lowest in years, which may spill over to the refined market by forcing smelters to cut output, especially in China. After Korea Zinc said in February it would cut 50,000 tonnes or 8% of its annual production, Zhuzhou, the largest domestic smelter, decided earlier this month to put 100,000 tpy of capacity on temporary but indefinite maintenance. Surprisingly, though, the NBS estimates that China’s refined production was up 4.4% year-on-year in the first two months of 2017, which suggests that smelters are still resilient for now.

In the physical market, US premiums moved still higher this week due to the ongoing strike at Noranda Income Fund’s zinc processing facility in Canada, which is tightening available supply. In Asia, premiums moved slightly lower because demand was rather soft as prices were considered to be too high. In Europe, premiums were steady amid ample availability and subdued spot buying interest.

Flows in visible inventories (LME & SHFE):

Visible stocks, which remain elevated by historical norms, have resumed their decline since the start of March so the global supply/demand balance may tighten again.

• LME zinc stocks – at 378,150 tonnes as of March 21 – are down 5,950 tonnes or 2% so far in March (including an increase of 2,475 tonnes so far this week) after falling 11,975 tonnes or 3% in February. In the year to date, stocks are down 49,700 tonnes or 12% after dropping roughly 35,000 tonnes or 8% in 2016.

• SHFE zinc stocks – at 186,298 tonnes as of March 17 – are down 11,597 tonnes or 6onnes so far in March (including a fall of 8,490 tonnes last week) after climbing by 35,690 tonnes or 22% in February. In the year to date, stocks are up 33,474 tonnes or 22% after falling 47,604 tonnes or 10% in 2016.

Supply/demand balance:

The ILZSG estimates that the market was in a deficit of 27,400 tonnes in January 2017 compared with a surplus of 6,000 tonnes in January 2016 after a deficit of 268,000 tonnes in the whole of 2016 compared with a surplus of 189,000 tonnes in 2015. The tighter fundamentals were driven by the demand side rather than supply, essentially owing to a notable surge in US apparent demand.