Shanghai, Jul. 24 (SMM) – Dragged down by tumbling LME zinc prices last Friday, SHFE 1211 zinc prices, the most actively-traded zinc contract, opened lower on Monday at RMB 14,610/mt, and then moved narrowly between RMB 14,560-14,630/mt. In the afternoon session, SHFE zinc market retreated lower as LME zinc plunged with a stronger dollar. Sell-offs at the tail of trading sent SHFE zinc prices to a recent low of RMB 14,450/mt. Finally, SHFE three-month zinc prices finished at RMB 14,465/mt, down RMB 320/mt or 2.16%. Technically, downward pressures were still available. Trading volumes were up 59,832 lots to 152,038 lots, and positions were up 24,266 lots to 161,742 lots.
In the spot market, spot discounts of #0 zinc over SHFE three-month zinc prices were RMB 70/mt in the morning business, with deals between RMB 14,510-14,550/mt. As SHFE zinc prices drifted lower, spot discounts narrowed to RMB 50/mt, and transactions were made RMB 14,480-14,510/mt. Imported zinc was traded at RMB 14,450/mt, and traded prices for #1 zinc were around RMB 14,450/mt. Falling zinc prices depressed smelters’ sales interest, and spot discounts narrowed as a result. Coupled with little arbitrage trading room, market supply was not sufficient on Monday, while downstream buying interest at lows was strong, leaving overall trading moderate. In the afternoon business, spot discounts narrowed further to RMB 20-30/mt in response to continuous declines in the SHFE market, with deals between RMB 14,420-14,430/mt. Transactions in the afternoon business were mainly made by traders.
Zinc prices stumbled higher last week. But China reemphasized last Friday regulations to the real estate sector should not loosen. On the other hand, Spanish government bond yields hit a record high, causing concerns to improve and zinc prices to plunge last Friday. Will zinc prices stop falling and stabilize this week?
60% market players are pessimistic, believing zinc prices should fall to RMB 14,250-14,350/mt this week. Zinc prices lack support in both macro economy and fundamentals to rebound. Spanish government bonds yields surged to a record high since the issuance of euro, causing concerns over Europe to grow. Besides, the IMF hinted it will not participate in further bailout to Greece, allowing concerns to improve. In this context, the US dollar index rebounded, pushing down LME zinc prices to USD 1,810/mt. LME zinc inventories have reached 1 million mt, weighing down LME zinc prices. As such, LME zinc prices will likely fall to USD 1,800/mt level.
The Ministry of Land and Resources required last Friday local governments should continue to strictly implement regulations to the real estate sector, causing SHFE three-month zinc contract prices to lose support from all moving averages. July and August are seasonal low demand period for zinc, while power restrictions are implemented in some regions. Imported zinc was highly available post the Dragon Boat Festival due to favorable SHFE/LME zinc price ratio, which had advantages in prices, squeezing domestic consumption and pushing down zinc prices. SHFE 1211 zinc contract prices should fall and fluctuate between RMB 14,250-14,350/mt. Spot prices should fall close to or RMB 50/mt below SHFE 1211 zinc contract prices.
30% investors believe SHFE three-month zinc contract prices should struggle around RMB 14,500/mt. The SHFE/LME zinc price ratio is high as LME zinc prices hit a record low, causing downstream purchases of LME zinc to increase, and giving support to LME zinc prices. LME zinc prices should struggle between USD 1,820-1,840/mt. Domestic smelters maintained operating rates low recently, and more smelters suspended production for maintenance, causing domestic supply surplus to ease. Besides, domestic social inventories have been falling since early 2Q, reflecting fundamentals began to improve. Smelters held goods at lower prices, giving support to zinc prices. As such, SHFE three-month zinc contract prices should move between RMB 14,350-14,500/mt, with spot discounts between RMB 50-80/mt.
Only 10% believe zinc prices will rebound this week, expecting additional stimulus policies will be released. China’s central bank frequently lowered interest rates and deposit reserve ratio, giving hope for the market. As Spanish government bond yields hit a new high, the market expects additional stimulus policies should be taken. As such, LME zinc prices should rebound to USD 1,840-1,850/mt. SHFE three-month zinc contract prices should rise to RMB 14,500-14,600/mt, while spot prices should resist increases, with discounts expanding to RMB 80-120/mt.