SMM Zinc Market Daily Review (2012-10-15)

SHANGHAI, Oct. 16 (SMM) -- On Monday, SHFE three-month zinc contract prices opened lower at RMB 15,130/mt, below the 30-day moving average. China's September CPI was up 1.9% YoY, and PPI fell by 3.6% YoY, in line with market expectations. SHFE three-month zinc contract prices fluctuated low between RMB 15,150-15,200/mt. Although many longs entered the market, the shorts also sold off goods, with SHFE three-month zinc contract prices finally closing at RMB 15,175/mt, down RMB 145/mt.

In domestic spot markets, discounts of #0 zinc were between RMB 170-190/mt, with traded prices between RMB 15,000-15,020/mt. #1 zinc prices were between RMB 14,970-14,990/mt. Smelters continued to sell goods despite plunging zinc prices, while goods were also released due to narrowing discounts, with supplies ample. Downstream buying interest was low since zinc prices did not stabilize, with transactions muted.

Last week, zinc prices plummeted due to concerns over European debt crisis upon the reopening of the SHFE market. LME zinc prices also fell to USD 1,900/mt.

60% of market players believe zinc prices should continue to fall this week. SHFE three-month zinc contract prices should fall further to RMB 15,000/mt. The EU summit will take place this week, and whether or not Greece will gain the third round of bailout funds and Spain’s official application for bailout are the focus of markets. The US dollar index will rise to 81. On the other hand, LME zinc prices remained high at 1 million mt, weighing on LME zinc prices. LME zinc prices lost the 60-day moving average today.

SHFE three-month zinc contract prices should fall further, with short momentum stronger. Supply surplus deteriorated as domestic smelters increased output sharply during September and October, while falling SHFE zinc prices narrowed discounts, allowing traders to arbitrage. In this context, goods supply available in the market was ample. Despite the high demand season, downstream buying interest did not improve, so increased supply surplus was barely consumed. Besides, the SHFE/LME zinc price ratio rose, allowing import losses to narrow. Imported zinc will inflow to China if the ratio continues to rise, and supply pressure will enhance. As a result, SHFE three-month zinc contract prices should fall to RMB 15,000-15,200/mt, and spot discounts will narrow to RMB 150-170/mt.

The remaining 40% believe SHFE zinc prices will stop falling and stabilize between RMB 15,200-15,300/mt. LME zinc prices are expected to move between USD 1,920-1,950/mt, around the 60-day moving average. Expectations that the 18th Party Congress will result in additional stimulus policies grew, while China’s 3Q GDP will be released this Thursday. With optimism, SHFE three-month zinc contract prices should stabilize and hover between RMB 15,200-15,300/mt. Production costs will give support to zinc prices, with spot discounts between RMB 170-190/mt.