SMM Zinc Market Daily Review (2012-10-22)

SHANGHAI, Oct. 23 (SMM) – On Monday, the most active SHFE zinc price gapped lower at RMB 14,960/mt due to the slump in LME zinc prices, falling below the 60-day moving average. In the morning, SHFE zinc prices hovered at RMB 14,960-15,000/mt given the slackening Chinese stock markets. In the afternoon, Chinese stocks began rising, but declines in LME zinc prices weighed on the most active SHFE zinc contract, with prices finally closing at RMB 14,965/mt, down RMB 150/mt, with resistance at RMB 15,000/mt.

In spot zinc market, #0 zinc prices were at RMB 14,810-14,840/mt, with discounts over the most active SHFE zinc contract price at RMB 120-150/mt. #1 zinc prices was firm at RMB 14,800/mt due to limited supply. Smelters were unwilling to move goods, but arbitrage trading was reported. Downstream buyers were still on the sidelines with low buying interest, leaving transactions limited.

Zinc prices generally fluctuated at low levels last week. As the EU summit did not result in positive news last week, the market was depressed. LME zinc prices failed to stand at the USD 1,900/mt and fell below all the moving averages, leading to pessimism of markets.

About 80% of market players believe zinc prices should lost support this week. SHFE three-month zinc contract prices should fall further to RMB 14,800/mt. HSBC’s PMI for major countries will be released on Wednesday, which is expected negative. Besides, the EU summit did not result in positive news, while European debt crisis remained unresolved, causing market concerns to increase. On the other hand, LME inventories continued to surge last week, with supply surplus in global zinc market growing. As a result, LME zinc prices fell to USD 1,870/mt.

In China, SHFE three-month zinc contract prices have no support at low levels. Domestic smelters increased output significantly in September, with supply surplus increasing, and weighing down domestic consumption. Although some smelters were hold goods at lower prices, but goods supply was still ample as traders arbitraged due to narrowing discounts. On the other hand, as the SHFE/LME zinc price ratio rose, imports gained profits. As imported zinc surged into domestic markets, spot prices were pushed down. SHFE three-month zinc contract prices should fall to RMB 14,800/mt this week, and spot discounts will narrow to RMB 80-120/mt.

The remaining 20% believes SHFE three-month zinc contract prices should struggle around the 15,000 mt/yr level. The market was expecting additional stimulus policies as both China and US will change their presidents in November. The US dollar index should struggle at the moving averages this week, with resistance at the 80n mark, and LME zinc prices should struggle around USD 1,900/mt.

Capital available in the market was sufficient as China’s central bank had implemented reserve repurchasing several times in October. With cash supports, smelters will not sell goods, and will give support to domestic prices. The rising Shanghai Composite Index will also support SHFE three-month zinc contract prices. SHFE three-month zinc contract prices should struggle around RMB 15,000/mt, with spot discounts between RMB 130-170/mt.