SHANGHAI, Jan 8 (SMM) – Despite recent gains in the most traded zinc contract on the Shanghai Futures Exchange, prices of SHFE zinc are likely to weaken in January as consumption drops off ahead of Chinese New Year.
As of Monday night, the SHFE 1903 zinc contract rose to end at 20,385 yuan/mt. SMM believes that macroeconomic developments improved market sentiment and spurred recent gains in SHFE zinc prices.
China's central bank said on Friday that it will cut the ratio of cash that banks must hold as reserves by 100 basis points, or 1%, to stimulate lending amid concerns over a slowing economy. The move will free up 800 billion yuan after banks utilise some of the 1.5 trillion yuan in liquidity released into the financial system to repay maturing medium-term loans.
The US and China began two-day negotiations on trade on Monday. Lu Kang, spokesman at the Chinese foreign ministry, said that China is willing to resolve its trade disputes with the US on an equal footing.
On Friday, Fed Chairman Jerome Powell said that the Fed is not on a preset path of rate hikes and it will be sensitive to the downside risks. The dovish tone weighed on the US dollar and provided some support to zinc prices.
However, this rebound in zinc prices is unlikely to sustain, SMM believes. With the approaching CNY, seasonality factors are likely to weaken consumption and cap gains in prices.
Growth in inventories also grew pressure on zinc prices. SMM data showed that social inventories of refined zinc across Shanghai, Guangdong and Tianjin gained 6,500 mt over the weekend and stood at 104,000 mt as of Monday January 7.
Despite supply bottlenecks, high zinc concentrate treatment charges might prompt smelters to maintain operation.
Pressure from poorer consumption would weigh on zinc prices in January. SMM expects the SHFE most liquid zinc contract to trade weakly in January with a floor price of 20,000 yuan/mt.