SMM Analysis: Is SHFE Zinc Facing Rising Short Squeeze Risk before Delivery?

SHANGHAI, Jun. 9 (SMM) - SHFE June zinc led gains of nonferrous metals prices on June 9 and closed the day at 22,600 yuan per tonne, the highest for this week, and a gain of 3.34%. The price spread between SHFE front-month and SHFE August zinc expanded to an all-time high of 1,540 yuan per tonne on June 8, SMM reported.

The following reasons are attributable to higher SHFE front-month zinc and expanding price spread between SHFE front-month and SHFE August zinc, SMM said.

Domestic refined zinc supplies are tight now. China’s refined zinc output was 407,000 tonnes in May, down 1.5% on the month and 10.4% year-on-year, according to SMM data. Refined zinc production in the first five months of 2017 totaled 2.118 million tonnes, a drop of 3.6% year-on-year. China’s refined zinc imports were 105,000 tonnes in the first four months of the year. SMM expects refined zinc imports to rise 27% on the month to about 60,000 tonnes in May. Total imports during January-May are expected to fall 36.3% year-on-year. Total supplies in China will remain tight, and will support zinc prices.

Meanwhile, downstream consumption is steady, with inventories falling. Die-cast zinc alloy and zinc oxide industries reported sluggish orders in May, and operating rates fell slightly. But orders at galvanizers were steady. Besides, environmental protection checks in North China ended in mid-May. Some plants replenished stocks after restarted production. Their operating rates increased slightly. Zinc consumption by downstream producers is expected to rise 0.14% on the month in May. China’s refined zinc supply is still in shortages in May. Combined zinc inventories in Shanghai, Guangdong and Tianjin were 129,000 tonnes by the end of May, down 39,000 tonnes on the month.

Price Gap Hit Record High between SHFE Front- and 3-Month Zinc, Spot Zinc to Tighten in Near Term, SMM Reports

Total inventories in the three markets fell for 13 weeks in a row and are now at a record high. The volume of imported zinc is limited and being consumed. In this context, spot zinc supplies in China will remain tight in the near term.

Delivery date nears, but deliverable brands available in the market are limited. Spot discounts of #0 zinc narrowed from 60-40 yuan per tonne against SHFE front-month zinc on June 2 and inverted to premiums on June 8, which expanded to above 100 yuan per tonne. Smelters refrained from selling at low prices, while downstream buyers hoarded stocks at lows, leaving spot supplies tight. Short squeeze risk helped zinc prices rise, expanding the price spread between SHFE front-month and SHFE August zinc expanded to an all-time high of 1,540 yuan per tonne on June 8. SHFE zinc warrants decreased 1,770 tonnes to 18,564 tonnes June 8, down nearly 20,000 tonnes on the month. About 66,800 tonnes of zinc is needed for delivery for SHFE front-month zinc.

Zinc Spot Premiums Expand in Shanghai as Supplies Tighten, SMM Reports

Zinc prices are set to fall after delivery, SMM predicts. Supplies are expected to increase with arriving shipments of imported zinc and ore. China’s refined zinc output may rise 9.6% month-on-month in June, and total supplies will add 9.8% month-on-month. Consumption will grow 0.7%, according to SMM survey. 

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