SMM Zinc Weekly Price Review and Forecast (24-28 Jun. 2013)

SHANGHAI, Jun. 24 (SMM) –
Review
Last week, LME zinc prices were pulled down by a series of negative economic news reports, falling below USD 1,850/mt, but still considered more resistant to declines than other base metals. Markets were cautious ahead of the US Federal Reserve's (Fed) policy meeting, with LME zinc prices fluctuating weakly and finding support at USD 1,850/mt. The Fed maintained its benchmark rate and left the monthly asset purchasing program unchanged, but raised US GDP growth expectations for 2014 to 3.0%-3.5% and lowered the US unemployment rate forecast to 6.5%-6.8%. Fed Chairman Ben Bernanke expressed support for scaling back the QE3 policies, which pushed up the US dollar index and weighed down zinc prices. HSBC's June PMI for China fell from May, triggering concerns over Chinese zinc demand and increasing selling pressure. In response, LME zinc prices dipped to USD 1,820.5/mt, but rebounded to USD 1,840/mt as a large number of shorts left the market after profit-taking and bargain hunters rushed in.

SHFE 1310 zinc contracts became the most actively traded contracts last week. SHFE zinc prices fluctuated narrowly between RMB 14,500-14,620/mt early in the week, and due to the sluggish China PMI figure for June, the Shanghai Composite Index fell to 2,082.82, its lowest level since December 2012, and down 2.77% in a single day. SHFE zinc prices plunged to RMB 14,255/mt later in the week, but after LME zinc prices stabilized and Chinese stocks markets rallied, some bargain hunters entered the market, pushing up SHFE zinc to RMB 14,400/mt.

In spot markets, premiums for #0 zinc against SHFE 1310 zinc contract prices expanded initially, but later narrowed. Cargo holders held prices firm due to tight supply, causing spot premiums to grow from RMB 50-80/mt to RMB 100/mt. As cargo holders increased supply to generate cash, spot premiums then contracted to RMB 60-90/mt. Faced with cash flow problems, smelters and traders were also forced to increase goods supply, and when combined with increased goods delivery, spot supply and imported zinc supply were also ample. However, downstream buyers turned cautious and kept inventories low due to market pessimism and a lack of orders, causing spot zinc prices to fall with SHFE zinc prices.

Forecast
The US dollar index should rise in the coming week as more details about QE3 are known, which will weigh on base metals prices. A slowing Chinese economy and tight cash flows pushed up short-term interest rates, increasing the delivery of goods for long-term contracts before the month's end. SMM sources report that orders from galvanizers were down, so major Chinese steel plants cut galvanized ex-works prices for July and reined in raw material inventories. In this context, LME zinc prices should find support at USD 1,810/mt, with SHFE 1310 zinc contract prices testing support at RMB 14,300/mt and spot premiums for # 0 zinc against SHFE 1310 zinc contract prices narrowing to RMB 50/mt.