SMM Daily Review – 2012/7/9 Zinc Market

Shanghai, Jul. 10 (SMM) – SHFE 1210 zinc prices, the most actively-traded zinc contract, opened lower at RMB 14,645/mt on Monday due to the disappointing US non-farm payrolls data. After opening, SHFE three-month zinc prices crept up, with prices moving between RMB 14,640-14,690/mt. In the afternoon session, the contract prices soared along with the entry of long positions, hitting a session high of RMB 14,785/mt. Later, profit-takings and sell-offs at highs caused the contract prices to erase early gains, with prices finally ending at RMB 14,695/mt, down RMB 20/mt or 0.14%. Trading volumes were down 55,024 lots to 107,420 lots, and positions were down 8,744 lots to 168,944 lots. 

In the spot market, spot discounts of #0 zinc over SHFE three-month zinc prices were between RMB 80-90/mt, with deals in the RMB 14,580-14,590/mt range. As zinc prices in the futures market rose, spot discounts expanded to RMB 100/mt. Spot zinc prices were slower to advance, and limited deals were made at RMB 14,600/mt. Recently, traded prices of imported zinc were generally flat with those of #1 zinc, depressing sales of domestic zinc. #1 zinc was traded between RMB 14,520-14,550/mt. Despite price losses, buying interest was low due to the pessimism. Meanwhile, limited changes in spot discounts also dented traders’ enthusiasm in purchases, leaving overall trading thin. As SHFE zinc prices rose rapidly in the afternoon session, spot discounts expanded to RMB 120-130/mt. Higher prices kept downstream producers away from the market, but increased spot discounts generated buying interest from traders.
 
The positive news reported from the EU summit last Friday has been absorbed. Long-awaited US non-farm employment data was worse than expected. But US did not push QE3, depressing the market.
 
Most market players are pessimistic towards zinc prices trends, believing zinc prices will not rebound. About 60% investors believe zinc prices should remain fluctuating this week, with SHFE three-month zinc contract prices moving between RMB 14,500-14,800/mt. expectations of QE3 implementation are positive, as PMI was sluggish across the world, the market hopes governments will take action. On the other hand, LME zinc canceled warrants surged further, and accounting for nearly 21% of inventories, which will support LME zinc prices. LME zinc prices should move between USD 1,840-1,880/mt.
 
Premier Wen Jiabao said China will take further actions to cope with recession. China’s CPI released Monday showed inflation eased, so the market is expecting more stimulus policies released by China’s central bank. SHFE three-month zinc contract prices should fluctuate between RMB 14,650-14,850/mt this week, with support at the 10-day moving average.
 
In domestic spot markets, many smelters cut output or suspended production this year, causing output to fall recently. Domestic inventories also decreased, allowing supply surplus to ease. On the other hand, cash flow problems at smelters eased this week, and they began to hold goods, giving support to spot prices. Besides, recent narrow discounts decreased arbitrage opportunities. As such, spot discounts should remain between RMB 90-120/mt this week.
 
The remaining 40% believe zinc prices should fall. As positive news was absorbed, and due to disappointing PMI, and since the US dollar index continued to rise, LME zinc prices should fall to move between USD 1,810-1,840/mt this week.
 
Despite domestic loans were loosened, downstream enterprises reported low orders and profit margins in the seasonal low demand period for zinc. With the lack of consumption, SHFE three-month zinc contract prices should lose support, moving between RMB 14,400-14,600/mt, with spot discounts narrowing to RMB 60-90/mt.