SHANGHAI, Aug. 17 (SMM) – LME zinc rose 1.6% on August 16 to breach $3,000 per tonne, peaking from October, 2007. October zinc on the SHFE led price gains of base metals. The price spread between SHFE front-month and SHFE 3-month zinc expanded, with spot premiums rising to 250 yuan per tonne.

What is driving factor of the sharp gains in zinc prices?

The following reasons may explain this. The average operating rate at Chinese zinc mines is expected to fall 1.5% on the month to 74.2% in August, according to SMM survey. And the rate at zinc smelters is expected to rise only 0.7% to 74.5% in August. Meanwhile, some mines and smelters in Sichuan have slashed or suspended production after the entry of central environmental protection team, which will drag down their operating rates in August. Supplies declined, and gave support to zinc price.

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The average operating rate at Chinese die-cast zinc alloy producers may rise 3.5% in August, with orders from galvanizers and zinc oxide plants steady. The peak demand period for zinc is setting in, but refined zinc inventories are still low. Traders purchase actively. In this scenario, goods available tightened further.

#0 zinc price inverted from 30 yuan per tonne discounts to 120 yuan per tonne premiums over SHFE September zinc on the afternoon of August 11. Spot premiums of regular zinc brands were around 250 yuan per tonne August 16. Spot supply tightness bolstered zinc, SMM said.

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Zinc prices may have upward room, SMM predicts. Although import losses changed to profit from August 14, overseas zinc ingot supplies are also limited. Meanwhile, LME zinc inventories continued falling. So, domestic zinc shortages will unlikely ease in the near term. When combined with the onset of peak demand season, supply tightness will exacerbate. Investors should be wary of short squeeze risk, SMM warns.

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