SMM Daily Review - 2011/12/5 Zinc Market

SHANGHAI, Dec. 6 (SMM) – On Monday, SHFE three-month zinc contract prices opened slightly higher at RMB 15,855/mt, boosted by LME zinc prices overnight, and inched down in the morning session. Finally, SHFE three-month zinc contract prices closed at RMB 15,715/mt, down RMB 35/mt. Trading volumes increased by 70,000 lots to 222,364 lots, and total position increased by 4,234 lots to 172,566 lots.

Central banks took action last week to push liquidity, while China's central bank cut deposit reserve ratio, pushing LME and SHFE zinc prices to touch record highs.

With regard to zinc price trends for this week, 60% market players believe SHFE three-month zinc contract prices should experience corrections, meeting resistance at RMB 16,000/mt level. The market had absorbed positive news last week, and investors are cautious ahead of the result of European finance ministers meeting. News reported that European central bank will increase purchasing government bonds, and inject USD 270 billion to the IMF, but the European debt crisis will barely thus ease. In this context, LME zinc prices will hardly break through USD 2,100/mt level. In domestic spot markets, SHFE three-month zinc contract prices finally failed to break through RMB 16,000/mt level, and spot discounts continue to expand, keeping the market cautious and downstream buying interest low. On the other hand, smelters increased goods supply at prices close to RMB 16,000/mt, while imported zinc is at high levels, so zinc prices will not rise significantly. SHFE three-month zinc contract prices should remain between RMB 15,500-15,800/mt, while spot zinc prices should be between RMB 15,400-15,700/mt, RMB 50-150/mt below SHFE three-month zinc contract prices.

20% of investors believe zinc prices are likely to continue rising. European central bank is expected to cut interest rate this week given disappointing manufacturing index, boosting the market. Besides, LME inventories continued to fall, with spot premiums expanding to USD 5/mt, which will support LME zinc prices. China's CPI in November is expected to fall. In this context, China is expected to further cut deposit reserve ratio, so SHFE three-month zinc contract prices should continue to rise, breaking through RMB 16,000/mt level and moving between RMB 15,800-16,200/mt. As spot prices barely rise due to unacceptable prices around RMB 16,000/mt, spot discounts should further expand, with spot zinc traded between RMB 15,700-16,000/mt.

The remaining 20% think SHFE three-month zinc contract prices should fall to RMB 15,300-15,500/mt. Although China cut deposit reserve ratio, liquidity should not be loose enough, so SHFE zinc prices will barely rise. Smelters will increase goods supply to generate cash at the end of the year, so spot discounts will barely narrow, with spot prices expected to be RMB 15,300-15,700/mt.