SHANGHAI, Dec 2 (SMM) - Zinc prices congested as a whole in November, after the prices soared before pulling back in October. As of November 30, the most-traded SHFE zinc contract closed at 22,870 yuan/mt, down 1,185 yuan/mt or 4.93% in the month.
The spot market shadowed the moves of futures. As of November 30, SMM #0 zinc ingot averaged at 22,930 yuan/mt, down 1,390 yuan/mt or 5.72% from the beginning of the month.
Fundamentals
Mining: Some local small and medium-sized mines have cut or suspended their production, intensifying the shortage of zinc ore supply. On the other hand, due to the demand for stockpiling in winter, the supply of zinc ore has been increasingly unable to meet the demand, and the TCs continued to fall.
Smelting: According to SMM statistics, domestic refined zinc output in October totalled 499,300 mt, a year-on-year decrease of 12.29%. From January to October 2021, the refined zinc output stood at 5.05 million mt, an increase of 1.31% year on year. In November, Guangxi Yusheng and Southwest Energy Mining were both put into operation, bringing addition ore supply to the market. However, due to the unexpected environmental protection production cut in Hanzhong, Shaanxi, SMM expects the refined zinc output in November to be about 516,600 mt.
Imports: According to the customs, the zinc concentrate imports in October 2021 were 317,599 mt (physical content), a year-on-year increase of 4.69%. The main reason is that the smelters’ supplies under long-term contracts have arrived at the port, and there were also concentrated arrivals through some shipping routes. In November, as the losses of imported ore expanded, the imports were restrained to some point. However, the output of domestic smelters continued to increase, hence the demand for zinc concentrate was robust. Meanwhile, the overseas supplies of goods under long-term contracts will arrive in China from November to December. Therefore, SMM predicts that the import volume of zinc concentrate in November may be around 300,000 mt.
Inventory: According to SMM data, the social inventories of zinc ingots in seven major regions in China have been declining after peaking on March 15, which refreshed the previous high recorded on April 20, 2020. As of November 29, the weekly inventory of zinc ingots across seven major regions totalled 133,300 mt, a decrease of 37,500 mt or 21.96% compared to November 30, 2020.
Downstream consumption
Galvanising: In early November, due to the extreme weather as well as the market's continued bearish outlook on steel prices, the operating rates of galvanised plate/sheet fell. Although galvanised pipe companies in north China were affected by the orange alert of air pollution by the end of November, some large factories were not affected by environmental protection restrictions due to their advanced categorisation of businesses. At the same time, steel prices rebounded in the week, and the galvanised pipe sales improved; hence the relative operating rates started to increase, which also driven the finished products inventory to drop. However, the overall operating rates in November are still expected to decline from October.
Zinc die-casting alloy: The operating rates at zinc die-casting alloy plants were higher than last year in H1. However, pre-Christmas orders failed to increase sharply amid shipping problems. The consumption for die-casting alloy products has been muted even in the traditional seasonal high. On the other hand, the plants in Guangdong continued to be affected by the power rationing policy in the third quarter, and the production of local die-casting plants was restricted. After the power rationing in Guangdong ended in November, the operating rates of die-casting plants have rebounded.
Zinc oxide: The operating rates of zinc oxide in November have been significantly higher than that in October. SMM believes that the tire sector can still support zinc oxide consumption under the circumstance of stable and positive automobile production next year. The orders from the feed sector were weak throughout the year due to the sluggish live pig industry.
Market outlook in December
In terms of LME Zinc, the overseas mining sector are disrupted by the following news: Trafigura’s three major smelters have reduced the production by 50%, the duration is unknown; Glencore's some refineries have adopted staggered production, which has minimal impact on the overall output. Going forward, the market needs to pay attention to whether the duration for production cuts will be extended, and whether Boliden and Teck's refineries will also be affected.
In terms of fundamentals, the current LME inventory in Europe has reached a low of 5,150 mt, and the local spot premiums have also reached a new high of $290/mt. The LME cash to 3-month backwardation also quickly rose to $92.5/mt on November 25. On the whole, the zinc prices will gain strong support from the low inventory and risk factors brought on by the high electricity prices.
However, the domestic market is completely different from overseas. The consumption has been quite weak due to the previous high zinc prices, and inventories in various regions have continued to rise, which suppressed zinc prices.
Looking forward to December, SMM lowered its previous forecast of zinc ingot production in December to around 537,000 mt. The performance of the consumer side was also pessimistic. In November, air pollution alters appeared in almost all parts in north China, and some areas have begun to restrict the use of natural gas. These situations are expected to intensify in December. At the same time, the market has mixed news about the production restriction policy for Winter Olympics in the first quarter of next year, which needs constant attention. In addition, the market shall also pay attention to the impacts of COVID on overseas markets. In general, the most-traded SHFE zinc contracts are expected to move between 22500~23800 yuan/mt in December.
