SHANGHAI, Dec. 1 (SMM) - SHFE lead and zinc prices both rose by daily limit on Monday but tumbled by limit on Wednesday. What’s behind the sharp gains and declines?

Zinc

The most active zinc contract on the SHFE broke through 25,000 yuan per tonne November 29, a level hit in November 2007. However, the contract plunged by daily limit the next trading day.

SMM understands the much inflated zinc has affected some industries, especially SMEs. One galvanizer told SMM some small plants stopped receiving orders as increases in processing fees were much less significant than those in zinc prices. Some small alloy producers also suspended purchasing against shrinking foreign orders. Small zinc powder producers were also unable to bear such high prices. Overall zinc consumption did not decrease significantly, though.

Plunging oil prices are believed to have depressed market sentiment and precipitated the across-the-board declines in base metals, SMM said. Besides, concerns over China’s liquidity increased. The Shanghai Interbank Offered Rate (SHIBOR) surged to a 2-month high with tightening liquidity. China’s supervision department also intervened to cool down futures markets. Meanwhile, tumbling ferrous metals also dragged down zinc prices, SMM added. Similar policy is expected for lead and zinc, which have been inflated recently. Big decline in positions of base metals especially zinc also reflects growing risk aversion.

Lead

The movement of lead is very similar with zinc during November 28-30.

Downstream industries were also affected by surging lead prices. Some of them intend to slash output. A few have cut output by 10-20% or even 30-40%, SMM said.

Conclusion

Fundamentals for lead and zinc did not change, SMM said. Zinc concentrate shortages will remain in the near term with shutdown and output cut at global mines and steady consumption. Despite big growth in domestic ore output, zinc concentrate imports contracted sharply. At the same time, TCs continued to slide, with inventories down sharply. Ore shortages may affect production at zinc smelters in Q1 2017, SMM reckons. Lead fundamentals are also good at present, with supply tightness expected to remain in the foreseeable future.

Investors are suggested to avoid risks in the near term as price fluctuation is expected to remain wild, SMM said.  

Lead and zinc will hold strong in the medium term ending Q1 2017, SMM predicts, citing good fundamentals, but will fall in the near term during mid-December and late November 2017. 

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