SMM Daily Review – 2012/8/6 Zinc Market

Shanghai, Aug.7 (SMM)- SHFE 1211 zinc prices, the most actively traded contract, opened high at RMB 14,620/mt on Monday after the US announced better-than-expected non-farm payrolls last Friday. After a high open, the contract moved steadily between RMB 14,620-14,700/mt. At the midday, a rising dollar dragged SHFE zinc prices lower, down as low as RMB 14,585/mt, and then hovered narrowly around the price range seen in the morning business. In the afternoon session, SHFE three-month zinc prices fluctuated in the RMB 14,620-14,700/mt, and finally closed at RMB 14,635/mt, up RMB 95/mt or 0.65%. Trading volumes were down 15,772 lots to 55,266 lots and positions were down 6,240 lots to 166,510 lots.

In the spot market, discounts of #0 zinc over SHFE 1211 zinc prices were between RMB 30-50/mt, with deals between RMB 14,580-14,600/mt. As SHFE zinc prices drifted lower, spot discounts changed little, and transactions were made between RMB 14,560-14,580/mt. Mild price declines failed to generate downstream buying interest, with quiet trading. #1 zinc traded between RMB 14,520-14,550/mt. Traders were active in moving goods on Monday, but downstream producers generally stood on the sidelines after price rose in early week, leaving trading low. 

Zinc prices stopped falling last Friday after falling early in the week. US July non-farm employment data and PMI were both higher than expected, stimulating investors’ risk appetite. The three major US stocks indices closed with gains, and LME zinc prices also closed higher at USD 1,840/mt. Most market players believe zinc prices will drop limitedly and remain steady.

Based on an SMM survey, about 60% market players believe zinc prices will continue to fluctuate this week. The US Federal Reserve’s and European central bank’s meetings did not result in any stimulus policies, with expectations of QE3 implementation also failing. On the other hand, US July non-farm employment data was better than expected, indicating US is in no hurry to push QE3. The US dollar index will move around 82, while LME zinc prices should move between USD 1,830-1,850/mt.

According to a most recent SMM survey, operating rates at some downstream enterprises even fell short of 50%. The high SHFE/LME zinc price ratio allowed imported zinc to surge into domestic markets, weighing down domestic spot prices. In this context, SHFE three-month zinc contract prices should move between RMB 14,300-14,500/mt this week, with spot discounts between RMB 30-50/mt.

The remaining 40% believe SHFE three-month zinc contract prices should fall to RMB 14,500/mt. Spain’s prime minister said the country is seeking bailout across the board. As a result, Spanish 2-year government bond yields dropped by 1 percentage point. On the other hand, euro zone retail sales for June rose, increasing market confidence. With optimism in the market, LME zinc prices should rise to USD 1,850-1,880/mt.
 
The market is expecting China’s July CPI will fall further, allowing China’s central bank to take additional stimulus policies. The central bank announced last Sunday that it will enhance fine tune and support real economic development during 2H. SHFE three-month zinc contract prices should touch RMB 14,800/mt, inching up to RMB 14,500-14,800/mt. in domestic spot markets, as domestic social inventories continued to fall since smelters cut output over the past month, spot supply surplus eased, while discounts of domestic brands also narrowed. Spot prices should remain firm this week, with discounts between RMB 50-70/mt.