SMM Daily Review - 2012/5/2 Zinc Market

SHANGHAI, May 3 (SMM) -- On Wednesday, SHFE three-month zinc contract prices opened higher at RMB 15,710/mt and fluctuated around the moving average during the day. Despite SHFE three-month zinc contract prices once dipped to RMB 15,630/mt at a time, they rallied and finally closed at RMB 15,680/mt, up RMB 75/mt. Trading volumes increased by over 3,000 lots to 61,990 lots, and total position decreased by 12,812 lots to 147,328 lots. SHFE 1208 zinc contract became more actively traded, with positions increasing by 9,994 lots to 103,070 lots.

In domestic spot markets, discounts of #0 zinc against SHFE three-month zinc contract prices were between RMB 170-200/mt, with traded prices around RMB 15,500/mt. Traded prices fell to RMB 15,450/mt at noon whilst discounts remained unchanged. #1 zinc was traded around RMB 15,450/mt. Goods supply available in the market was tight as smelters have been holding goods and since imported zinc was consumed. Cargo holders were unwilling to sell goods at lower prices, while downstream buyers were also cautious, keeping transactions quiet.

During the Chinese May Day holiday, macro-economic news was mixed. Manufacturing PMI data in major economies was positive, but the recovery remains slow. The US dollar index slid below 79, helping support LME zinc prices, though.

According to SMM survey of price outlook this week, approximately 50% market players expect zinc prices to maintain its rising pace, and SHFE three-month zinc prices may move between RMB 15,700-15,800/mt. The mildly positive manufacturing PMI data in China and US has eased market worries over economy, helping LME zinc prices rise above all the moving averages, with a solid support at USD 2,000/mt. LME zinc prices may test USD 2,050/mt. In domestic markets, cash tightness at enterprises has eased after the month's end. So, smelters are not in hurry in sales, and this will support spot prices. Coupled with the arrival of 2Q, downstream demand will improve further, which will also boost consumption. Technically, SHFE zinc prices remain on its upward track, and are expected to test RMB 15,800/mt. Spot discounts will remain RMB 180-220/mt this week, due to smelters' unwillingness to move goods.

Around 40% market participants expect prices to drop this week after gains during the holiday period. LME zinc market moved higher during the Chinese May Day holiday, with prices climbing above all moving averages, but the resistance at the USD 2,050/mt mark is strong, and declines are technically available. Those market players believe that LME zinc prices will hover in the USD 2,020-2,050/mt range this week.  In domestic markets, markets expected a cut in reserve requirement ratio by China's central bank, but no action has been taken yet. Zinc prices will come under downward pressure, along with the absorption of positive news during the holiday period and the lack of further more favorable ones. In addition, the favorable SHFE/LME zinc price ratio in recent days has promoted zinc imports, and this will drag down spot prices. SMM expects SHFE three-month zinc prices to drop to RMB 15,500-15,600/mt, and with spot discounts between RMB 150-180/mt.

The rest 10% market players believe zinc prices will keep fluctuating this week. During the holiday period, the US dollar index fell back to 79, and may rebound. Meanwhile, market focus may be shifted to the European debt issues again after absorbing market positive news. Besides, LME zinc inventories are as high as 920,000 mt, another negative factor for zinc prices. Hence, LME zinc prices will return to around USD 2,000/mt, with prices hover between USD 2,000-2,020/mt. SHFE three-month zinc prices are expected to between RMB 15,400-15,500/mt, with spot discounts around RMB 120-150/mt.