Macro Economy Expectation is Pessimistic with Fundamentals Still Serving As a Support

SHANGHAI, May 16(SMM) - The market shall focus on the US industrial output in April, the April CPI in the eurozone, the annualised total new housing starts in the US in April, the annualised sales of US completed homes in April. In terms of events, the European Central Bank President Lagarde will make a speech on May 18.

The Fed Chairman Powell will be interviewed by the Wall Street Journal; the European Central Bank will release its April monetary policy meeting minutes.

For LME zinc, the concerns about the macro front have affected the market. As the Fed’s interest rate meeting in May ended with a rate hike by 50 basis points and the tapering of balance sheet starting from June 1, it means that the Fed's monetary policy has been tightened. And since the end of the meeting, prices of non-ferrous metals fell from the high level, which indicated that the transaction logic turned from the supply shortage to the weak expectations of future economy and consumption.

In terms of the fundamentals, in the overseas market, the supply issues have not been solved yet. With high electricity prices in Europe, smelting costs remained high. As the zinc prices dropped, smelters in Europe suffered losses. The smelters that reduced or suspended the production may not resume work in the short term, leading to the continued shortage in supply.

On the consumption side, the inventory of LME fell at a slower pace in May compared to April. The exported zinc ingot from China was delivered to LME warehouses. Then the LME cash-to-3-month backwardation narrowed, which dragged down the market's confidence in consumption. But the strong consumption remains in place at present, and LME inventories are still in a downward trend while the spot premiums in European market move upwards and stood at around $500/mt in early May.

In general, the fundamentals in overseas market have remained unchanged with the support for zinc prices. LME zinc prices are expected to rebound slightly and move between $3,450-3,850/mt.

For SHFE zinc, the market shall focus on the following factors: 1. The supply remained tight on the mine end and TCs of zinc concentrate fell to 3,500 yuan/mt, while TCs in Yunnan dropped to 3,300 yuan/mt, which raised production costs at smelters. Whether the costs can support the zinc prices or not remains unsolved. 2. As the rising SHFE/LME price ratio led to the complete closure of the export window, arbitrage position holders who planned to export may have the possibility to gain profits after closing the positions. Therefore, these invisible inventories of zinc ingot may become visible. The market shall focus on changes in domestic inventories. According to market sources, most zinc ingots have booked the ships as well as overseas warrants with unchanged export plans. 3. The rising SHFE/LME price ratio also resulted in the open of the import window on the mine end. Although it cannot solve the issue of supply shortage on the mine end, some smelters have started to restock for Q3, which means that the output of zinc ingot in the second half of 2022 will pick up. 4. The impact of the pandemic is still of key importance. Only when the pandemic subsides can we expect a recovery in consumption and a stimulus to consumption from the policy end.

In general, the further price movement of zinc need to be driven by strong domestic factors. Before then, zinc prices are likely to rebound slightly. SHFE zinc prices are expected to move between 24,500-27,000 yuan/mt in the short term.