SMM Daily Review – 2012/8/13 Zinc Market

SHANGHAI, Aug. 14 (SMM) – SHFE 1211 zinc prices, the most actively-traded contract, opened lower at RMB 14,670/mt on Monday. After opening, the contract moved lower along with a stronger dollar and pressures from shorts, and then fluctuated between RMB 14,620-14,640/mt. in the afternoon session, SHFE zinc market was dragged further lower by weak movements in domestic stocks market, reaching an inter-day low of RMB 14,585/mt. Finally, SHFE three-month zinc prices closed at RMB 14,590/mt, down RMB 80/mt or 0.55%. Trading volumes were down 42,192 lots to 36,804 lots, and positions were up 216 lots to 157,962 lots, dominated by shorts. 

In the spot market, discounts of #0 zinc over SHFE 1211 zinc prices were between RMB 10-20/mt, with deals between RMB 14,610-14,620/mt. With price movements in the SHFE zinc market, spot discounts expanded to RMB 20-30/mt, and transactions were made between RMB 14,620-14,630/mt. Deals for imported zinc were between RMB 14,570-14,580/mt, and RMB 14,540-14,570/mt for #1 zinc. Despite declines in futures market, downstream buying interest was low during the first trading day of the week, leaving overall trading low. 

With regard to zinc prices this week, most market players believe zinc prices will remain fluctuating. 70% believe SHFE three-month zinc contract prices will move between RMB 14,600-14,700/mt. Both Spanish and Italian government bond yields fell, while US did not push QE3, so macro-economic news should be still quiet this week. LME zinc prices should hover between USD 1,820-1,840/mt.

Both demand and supply are weak. Most smelters cut output or suspended production since early this year, with the output through recent months almost the record low since 2010, while domestic inventories continued to fall, causing supply surplus to ease and with spot prices slightly below or even leveling with futures prices. On the other hand, downstream demand was extremely sluggish. According to the most recent SMM survey, operating rates in some industries were as low as 40%. With weakening demand and supply, zinc prices have no direction.

Due to narrow price spreads between SHFE zinc contracts and small discounts, there is no opportunity for arbitrage operation. SHFE three-month zinc contract prices should remain fluctuating between RMB 14,600-14,700/mt, with spot discounts between RMB 30-50/mt.

20% market players believe zinc prices will likely stop falling and rebound. SHFE three-month zinc contract prices should move between RMB 14,700-14,800/mt. They base their opinion on optimism that China’s central bank will cut deposit reserve ratio or interest rates soon. China’s CPI for July fell while PPI also dropped. Besides, the Shanghai Composite Index rallied. As such, SHFE three-month zinc contract prices should move between RMB 14,700-14,800/mt, with spot discounts between RMB 50-70/mt.

US retail sales for July will be announced this week, and are expected higher than the previous data. LME zinc inventories have been falling recently, so LME zinc prices should move between USD 1,840-1,860/mt.

The remaining 10% believe SHFE three-month zinc contract prices should fall to test RMB 14,500/mt level. They believes euro zone GDP for 2Q released this week will be negative. As such, the US dollar index should continue to rise, pushing down LME zinc prices to USD 1,800-1,820/mt. SHFE three-month zinc contract prices should move between RMB 14,400-14,500/mt, with spot discounts narrowing to RMB 30-0/mt.