SMM Daily Review – 2012/6/4 Zinc Market

Shanghai, Jun. 5 (SMM) – On Monday, SHFE zinc market moved along with domestic stocks market, as LME market was closed for Spring Bank holiday. After opening low at RMB 14,665/mt, SHFE three-month zinc contract prices fluctuated narrowly, and dived at the midday as stocks market slumped, dipping to a new low of RMB 14,470/mt. Supported by buying activities at lows, SHFE three-month zinc contract prices rallied, but any rising momentum was limited. Finally, SHFE three-month zinc contract prices finished at RMB 14,550/mt, down RMB 250/mt, or a drop of 1.69% from a day ago. Trading volumes were up more than 80,000 lots to 188,344 lots, and positions were up 6,236 lots to 182,186 lots, dominated by the shorts.

In the spot market, spot discounts of #0 zinc were RMB 50 against SHFE 1209 zinc prices, the most actively-traded contract, with deals between RMB 14,600-14,620/mt. Prices of #1 zinc ranged between RMB 14,560-14,590/mt. After hitting a new low this year at the midday, spot discounts of #0 against SHFE three-month zinc prices narrowed to RMB 10/mt, and traded prices were between RMB 14,560-14,590/mt. Limited deals were made for #1 zinc, with prices unchanged. Domestic zinc smelters were reluctant to move goods on Monday, but narrowed spot discounts opened room for hedged goods. Middlemen and downstream producers went bargain hunting, helping improve market transactions.

Eurozone PMI released last Friday was disappointing, while US non-farm employment data was also much lower than expected. As a result, LME zinc prices hit a new low last Friday, dragging down SHFE zinc prices to open low and move lower, hitting a fresh low for the year in the midday.

The latest SMM survey shows that 70% market participants believe SHFE 1209 zinc contract prices should fall further to RMB 14,200/mt this week. Negative news from major economies last week shows slow recovery, and HSBC released China’s PMI was below 50, while European PMI and US non-farm employment data were low, and unemployment rate remained high. On the other hand, European debt crisis is still the focus of markets. With the exception of Greece, Spain’s government bond yields surged. Although LME market is closed on Monday and Tuesday, the US dollar index remains moving above the 5-day moving average. LME zinc prices should fall to USD 1,820-1,840/mt upon reopening. In domestic markets, despite smelters are holding goods, imported goods will surge into domestic spot markets in June and July due to the high SHFE/LME zinc price ratio, weighing down zinc prices. As such, SHFE 1209 zinc contract prices should move between RMB 14,200-14,500/mt, with spot prices close to ore RMB 10/mt below SHFE 1209 zinc contract prices.
 
20% market players believe SHFE zinc prices should not fall sharply. As negative news was released last week, LME zinc prices should fluctuate between USD 1,840-1,860/mt. Domestic smelters are holding goods due to falling zinc prices, so goods available are limited, causing buyers to enter the market. Besides, as the SHFE/LME copper price ratio narrowed, investors should buy zinc futures contracts whilst sell copper futures contracts, giving support to zinc prices. In this context, SHFE 1209 zinc contract prices should fluctuate weakly between RMB 14,500-14,600/mt, with discounts between RMB 10-40/mt.
 
The remaining 10% believe zinc prices should rebound. The rebounding LME zinc prices last Friday showed large numbers of buyers. LME zinc prices are expected to rally to USD 1,860-1,880/mt. Approvals of domestic projects should boost demand, with stimulus policies expected to support zinc prices. Besides, May CPI will likely continue to fall, so China might lower deposit reserve ratio. In domestic spot markets, prices are mixed across regions. Prices in Tianjin are higher than Shanghai due to limited supply, causing some spot goods in Shanghai to flow back to Tianjin and Guangdong. As such, SHFE 1209 zinc contract prices should move between RMB 14,600-14,700/mt, with discounts expanding between RMB 50-80/mt.