SMM Zinc Market Daily Review (2013-2-25)

SHANGHAI, Feb. 26 (SMM) – SHFE 1305 zinc contract price opened RMB 145/mt lower at RMB 15,550/mt on Monday, and fell briefly before gaining support at RMB 15,500/mt. Later, prices rose to move between RMB 15,550-15,570/mt due to buying support and finally ended at RMB 15,550/mt, a decline of RMB 145/mt or 0.92% from the previous trading day. Trading volumes were up 11,656 lots to 77,986 lots, and positions were down 8,168 lots to 126,870 lots. Inventories at SHFE approved warehouses for zinc contract delivery remained flat with last Friday at 243,246 mt.

Traded prices for #0 zinc in spot market were largely between RMB 15,270-15,290/mt, with spot discounts over the 1305 SHFE zinc contract narrowing to RMB 280-290/mt. Traded prices for #1 zinc averaged RMB 15,230-15,350/mt. As zinc prices fell steadily, a few smelters hold back goods and were reluctant to move goods at low prices. Some arbitrage zinc flowed out, and supply of spot zinc was sufficient. More traders and downstream producers entered market, and overall transactions slightly improved.

Renewed concerns over the firm US dollar index and economic recovery in the euro zone sent zinc prices down. How will zinc prices move this week?

47% of market players surveyed by SMM anticipate that zinc prices will continue to fall this week, but will fall less sharply compared with last week. LME zinc should test support at USD 2,045/mt, and SHFE zinc may find support at RMB 15,450/mt. Spot zinc supplies will be ample, with spot discounts over the most active SHFE zinc contracts expected at RMB 280/mt. In macro news, markets are eyeing the Italian general election. The Italian economy has been shrinking for a sixth straight quarter, pushing the country’s government debt up. In this context, Italy’s Prime Minister Mario Monti introduced reform measures, easing the Italian debt crisis some. However, it is uncertain whether these measures will be sustained after new leaders take office. The minutes of the policy meeting released by the US Federal Reserve (Fed) last week sparked fears that the Fed may halt its asset repurchase program sooner than expected. Investors are awaiting Fed Chairman Bernanke’s speech due Tuesday for further clues. If Bernanke gives hints that QE will be ended early, the US dollar index will rise further, which will weigh down zinc prices. Besides, this week will be the last week before automatic spending cuts take place. If spending cuts are effective, zinc prices will drop further. LME zinc inventories are now around 1.18 million mt, slightly down from last week. Cancelled warrants also displayed downward trend, so high inventories will continue to put downward pressure on zinc prices. In domestic markets, futures warrants at SHFE delivery warehouses grew steadily to 243,246 mt last Friday, an increase of 12,644 mt from pre-holiday levels.

The remaining 53% believe zinc prices will be in correction following sharp declines earlier. LME zinc should find support at USD 2,070/mt, with price range at USD 2,070-2,120/mt. SHFE 1305 zinc contract prices are expected to fluctuate in the band of RMB 15,500-15,800/mt. Spot discounts over the most active SHFE zinc contracts will narrow slightly to RMB 250-270/mt thanks to an expected rally in spot zinc demand. On macro news, the US will announce the revised GDP for 4Q annualized, January existing home sales, February ISM Manufacturing Index, all scheduled in this week. Most expect these economic indicators to be positive, giving support to zinc prices. In domestic markets, almost all traders have returned to markets now that the Lantern Festival is over. Downstream producers are beginning to resume production. Sharp zinc price declines should stoke strong buying interest from producers, which will likely help zinc prices stabilize.