SHANGHAI, Sep 21 (SMM) – The ratio of the most traded SHFE zinc contract to LME three-month is likely to stay at high levels in the short term given limited upward room seen in LME zinc and in anticipation of a persisting short squeeze in the domestic market, SMM expects.
As of Thursday September 20, the ratio stood at 8.8, up from 8.24 recorded at the beginning of August, suggesting more strength in SHFE zinc than in its LME counterpart.
Easing shortage of global zinc concentrate supply and relatively high LME inventories undermined fundamentals of LME zinc and kept it more susceptible to macroeconomic turmoil.
Stocks across LME warehouses have been standing above 200,000 mt since April, keeping some distance from lows of around 130,000 mt in March, SMM data showed.
Meanwhile, low domestic inventories firmed SHFE zinc. Social stocks across Shanghai, Tianjin and Guangdong held stable at about 110,000 mt since July and inventories in Shanghai-bonded areas continued to decline as an import arbitrage window has been open since mid-August. As widening profit margins improved the morale among importers, Shanghai-bonded stocks has decreased more than 60,000 mt since August 3 and stood at 76,000 mt as of Thursday.
Supply of domestic cargoes tightened as tumbles in zinc prices in mid-August jeopardised production enthusiasm across smelters. While inflows of imports helped to offset the declines in output at domestic smelters, social inventories remained at low levels and supply of cargoes that can be delivered constricted. This triggered a short squeeze and strengthened SHFE zinc.
The recent short squeeze is likely to sustain in the near term as a shortage of deliverable cargoes would be further tightened due to the Mid-Autumn Festival and the National Day holiday.