SHANGHAI, Jul. 1 (SMM) –

Review

As China's liquidity crunch plagued markets last week, LME zinc prices were also weighed down to around USD 1,850/mt. The Shanghai Composite Index plunged early in the week, pushing down global stocks markets and commodity prices, and dragging down LME zinc prices to USD 1,812/mt, only USD 0.2/mt above the year's record low. After the People's Bank of China (PBOC) stepped in to improve liquidity, LME zinc prices edged up to hover within the USD 1850-1,810/mt range for the remainder of the week. SHFE 1310 zinc contract prices fell due to falling overseas market prices, but found solid support at RMB 14,300/mt and generally moved between RMB 14,300-14,450/mt. The slumping Shanghai Composite Index distressed market sentiment early in the week, with short selling pressure pushing down SHEF zinc prices to RMB 14,225/mt and moving towards a record low for the year of RMB 14,165/mt. However, after shorts closed positions due to easing concerns over China's liquidity, as well as from positive industrial profit margins in May, SHFE zinc prices bottomed and rebounded toward the 10-day moving average.

In China's domestic spot market, spot premiums for #0 zinc against SHFE 1310 zinc contract prices were initially between RMB 80-110/mt, but turned to discounts later in the week as cargo holders of copper, aluminum and lead all sold goods due to tight cash flows. The availability of zinc ingot was low, however, and when combined with some investors buying spot zinc while also selling SHFE zinc contracts, helped push up spot premiums while stocks in Shanghai, Guangdong and Tianjin all continued to fall. Although some smelters were actively moving goods to generate cash, supply did not grow noticeably as more smelters suspended production. Downstream enterprises produced according to orders and purchased raw materials on an as-needed basis due to low orders, tight cash flows and market pessimism. Supply pressure did not increase significantly, however, so transactions were still muted.

Forecast
Many countries will release June PMIs in the coming week. Euro zone June PPI, US ADP June employment figures, the US employment report for June, and interest rate decisions by the Bank of UK and European central bank will also be announced. Zinc price fluctuations will widen, but any room to fall will be limited due to cost support and falling inventories. LME zinc prices will test USD 1,810-1,800/mt, but with resistance at USD 1,850/mt. Investors were not too bearish, however, given current cost support. SHFE 1310 zinc contract prices will continue to test RMB 14,300/mt, but may fall as far as RMB 14,000/mt if support is lost. Downstream demand for zinc will weaken as the low demand season sets in, but low goods availability will support spot premiums for #0 zinc at RMB 100/mt, but may fluctuate widely with SHFE zinc prices.