Analysis: SHFE zinc gains as risk-taking sentiment improves after US-Sino trade talks

SHANGHAI, May 8 (SMM) – SHFE zinc climbed up unexpectedly on Monday May 7 as it traded without being weighed down by its LME counterpart, and as risk-taking sentiment in the market recovered after the US-China trade negotiations.

The SHFE zinc index gained 2.49% during the day on May 7 as shorts reduced their positions with a total of 25,700 lots of decline in the SHFE zinc index. Support was seen at 23,000 yuan/mt yesterday.

China’s new guidelines for the asset management industry released in late April also bolstered the market, on expectations that monetary policy will ease.

Fundamentally, SMM expects prices of futures to rise despite bearish sentiment.

Domestic zinc supplies are tight as operating rates across smelters remain at low levels. Many major domestic smelters cut production and underwent maintenance in March as prices of zinc futures declined. In April, operating rates across smelters stood at just 72.1%. SMM understands that some smelters are still undergoing maintenance in May, and estimates operating rates across smelters to stand at 72% this month. 

Given tight supplies of zinc concentrate, domestic zinc concentrate treatment charges (TCs) have remained unchanged since the start of 2018 while the international annual benchmark TCs in 2018 dropped 14.5%, from 2017, to a 12-year low of $147/kg. This further weighed on operating rates across smelters. 

Demand remains firm with zinc social inventories in Shanghai, Tianjin, Guangdong down 65,400 mt in April. The high season of consumption was delayed to April-May due to the two political sessions and extended winter production cuts.

However, high zinc inventories at the bonded zone suggested a potential inflow of zinc imports and this is likely to depress the market.

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