Zinc to Face Great Pressure before Chinese New Year Holiday, SMM Says

SHANGHAI, Jan. 18 (SMM) - Nonferrous metals plummeted across the board January 17, with zinc leading price declines. As of 4:30 pm, LME zinc fell 2.04%. SHFE March zinc closed at 22,050 yuan per tonne, a drop of 3.42%.

In addition to macroeconomic factor, weak market fundamentals dragged down zinc and fueled exodus of longs before the 2017 Chinese New Year holiday, SMM said.

Zinc Supply Increases YoY due to Weaker-than-Expected Output Cut

Raw material tightness and thinner profit from falling zinc prices depressed zinc smelter production, SMM finds in a survey. When combined with environmental protection inspections and low-demand season, China’s refined zinc output was 465,000 tonnes in December, down 1.8% month-on-month. China’s refined zinc output is expected to fall further in January to 453,000 tonnes, a slide of 2.5% month-on-month, but up 5.3% year-on-year. Production cut at zinc smelters will be less than expected in Q1 2017. China’s refined zinc output will be 1.29 million tonnes in Q1, up 1.6% year-on-year but down 8.5% month-on-month, SMM predicts.

Zinc Ingot Inventories to Grow on Slack Consumption

The average operating rate at domestic zinc oxide producers, die-cast zinc alloy plants and galvanizers will be 54%, 41.8% and 46% in January, down 5.8%, 22% and 23% month-on-month, SMM survey reveals. The slow-demand season will curb zinc downstream demand.

Meanwhile, SMM #0 zinc prices averaged 21970 yuan per tonne as of January 17, up 72% year-on-year, SMM calculates. In this scenario, downstream producers are unwilling to build stocks. Inventories at zinc downstream producers averaged 9 days sufficient to production in January, compared to around 14 days in the same period of last year, according to SMM survey.

In the meantime, zinc inventories in Shanghai, Tianjin and Guangdong added 15,300 tonnes to 216,000 tonnes in January. Spot premiums inverted from 200-300 yuan per tonne early in the month to discounts of 70-0 yuan per tonne. The weak spot market, combined wthi rising risk aversion before holiday precipitated leaving of longs in the futures market, SMM said. Total positions on SHFE zinc decreased over 20,000 January 17, down 48,000 from a week earlier.

Downstream producers are expected to restart earlier after the 2017 Chinese New Year holiday compared to years past. But spot prices will remain weak within two weeks following the holiday, despite stock replenishment following the holiday, SMM predicts.

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