Tightness in stocks to keep Shanghai zinc from sharply falling in short term

SHANGHAI, Jul 5 (SMM) – Shanghai zinc is unlikely to dive in the short run as recent gains was insufficient to fully ease tightness in social inventories.

The most active zinc contract on the Shanghai Futures Exchange is expected to trade rangebound with support from the 19,000 yuan/mt and pressure from the 20,000 yuan/mt.

SMM data showed that social inventories of refined zinc across Shanghai, Guangdong and Tianjin expanded no more than 10,000 mt in June, and stayed at around 150,000 mt. Stocks are unlikely to climb above 200,000 mt in July, even as consumption slows in a low season.

Supply, meanwhile, is expected to see limited upside. Nationwide output came in at 496,200 mt in June, which is close to the expected peak of monthly output of 500,000 mt.

But we see further downside room in zinc prices as treatment charges for domestic zinc concentrate have yet to substantially fall, which means that miners could still endure the current zinc price levels.

Chinese miners and smelters now remain in a deadlock over concentrate TCs, after a rebound in imports sent the market back to well-supplied.

If it costs 10,000 yuan to produce 1 mt in Zn content of concentrate, miners and smelters now see similar profit margins after zinc prices fell from 21,000 yuan/mt to 20,000 yuan/mt.

The decline in zinc prices narrowed smelter margins by 200 yuan/mt, and miner margins by 800 yuan/mt. Smelters still see high margins, and will maintain high production.