Supply bottlenecks, stable demand to steady SHFE zinc into near term

SHANGHAI, Nov 28 (SMM) – Despite expectations of greater supplies, current supply bottlenecks and stable demand across Chinese markets are likely to limit downside room in SHFE zinc, SMM believes.

The SHFE 1901 contract posted a six-day losing streak on Tuesday November 27 as weakness across crude and the ferrous complex as well as downbeat Chinese industrial profit data shook the market.

The National Bureau of Statistics (NBS) said on Tuesday that profit growth at China's industrial firms slowed for a sixth straight month in October. Last month, China’s industrial profits rose 3.6% from a year earlier.

Inflows of seaborne zinc concentrate pushed up treatment charges TCs across domestic markets, cementing anticipations of greater supplies.

As of Tuesday November 27, TCs for domestic concentrate were mostly heard at 4,800-5,200 yuan/mt in Zn content with TCs for seaborne materials at $130-140/dmt. SMM expects TCs to climb to 4,900-5,300 yuan/mt in Zn content and $150-170/dmt in December.

Rising TCs that widen profit margins across smelters improved production enthusiasm among smelters, but environmental issues continued vexing them. SMM data showed that operating rates across Chinese zinc smelters stood much lower than the same period last year.

Social inventories of refined zinc across Shanghai, Guangdong and Tianjin stood at 126,300 mt as of Monday November 26, up 1,100 mt from Friday November 23 but down 3,200 mt from Monday November 19, SMM data showed. Current inventories stood at record lows. Social inventories of refined zinc are unlikely to climb from current lows in the near term.

Consumption remained sluggish. While a closed import arbitrage window limited inflows of seaborne materials and supply failed to expand substantially, social stocks across China did not see steep losses, suggesting weak demand across markets.

SMM data showed that demand for zinc would enter a low season in the fourth quarter and in the first quarter of 2019. Recent declines in the ferrous complex are expected to push galvanising plants into negative territory. Meanwhile, orders for zinc oxide, zinc alloy and die-castings shrank sharply from a year earlier due to the lacklustre automobile, home appliance and property sectors. This would keep zinc consumption being weak.

There is, however, little potential for demand to significantly decrease in the short run. Dips in zinc prices prompted downstream consumers to stockpile.