SMM Daily Review - 2011/12/26 Zinc Market

SHAGNHAI, Dec. 27 (SMM) -- On Monday, SHFE three-month zinc contract prices opened at RMB 14,970/mt, lacking direction from the LME market, and then inched down later in the day. As large numbers of shorts left the market in the midday, SHFE three-month zinc contract prices plunged and finally closed at RMB 14,640/mt, down RMB 325/mt or 2.17%. Trading volumes increased by 140,000 lots to 369,294 lots, and total position increased by 61,098 lots to 262,970 lots.

In domestic spot markets, spot prices were RMB 120-150/mt below SHFE 1203 zinc contract prices in the morning, around RMB 14,700/mt. As SHFE zinc prices slumped in the midday, spot discounts remained around RMB 120/mt, with traded prices between RMB 14,630-14,650/mt. #1 zinc was traded between RMB 14,600-14,650/mt, while imported zinc prices were still RMB 170/mt below SHFE 1203 zinc contract prices. SHFE zinc prices continued to drop in the afternoon, with spot prices as low as RMB 14,500/mt. Some downstream buyers purchased at lower prices but modestly, with transactions muted.

With regard to zinc price trends this week, 80% market players believe SHFE three-month zinc contract prices should hold firm at RMB 14,300/mt level. The SHFE market will be closed during the New Year's holiday. SHFE zinc prices should find support as investors will build stocks ahead of the holiday and smelters are actively selling spot goods due to cash flow problems. Cash flow problems in the market eased due to speculations that China's Central Bank will further cut deposit reserve ratio during the New Year's holiday. SHFE three-month zinc contract prices should move between RMB 14,300-14,800/mt, meeting resistance at RMB 15,000/mt, and with spot discounts remaining between negative RMB 50-150/mt.

Only 10% believes SHFE three-month zinc contract prices should further dip to RMB 14,000/mt level. They think cash flow problems will deteriorate in the week despite speculations of deposit reserve ratio cut. Domestic demand is disappointing this year, and some downstream producers even sold off inventories and cut output or even suspended production in advance. The market lacks confidence with the euro zone. In this context, SHFE three-month zinc contract prices should move between RMB 13,800-14,300/mt, with spot prices between RMB 14,000-14,400/mt.

The remaining 10% are optimistic on speculations of deposit reserve ratio cut by the Central Bank. Besides, they believe as cash flow problems ease, SHFE three-month zinc contract prices should rise to between RMB 14,800-15,300/mt, with spot discounts expanding to negative RMB 200-300/mt.