[SMM Analysis] what is the story of zinc's strong breakthrough through the Qiqi pass and the macro-promotion of external fundamentals?

SMM7, March 8:

Within the day, the main 2008 contract of Shanghai Zinc rose 1.94%, easily breaking the Wanqi pass to refresh the recent high to 17115 yuan / ton, leading the increase in the non-ferrous sector. Is there any new story brewing about zinc fundamentals? SMM analysis is as follows:

From a macro point of view, US stocks have repeatedly hit record highs, with the Shanghai Composite Index rising more than 400 points in the past week to refresh its highest level since February 9, 2018, as market risk appetite runs high, providing conditions for a stronger zinc.

In terms of fundamentals, two logics exist at the same time:

First, 1) domestic mineral production has rebounded seasonally, while overseas mines have emerged from the haze of the epidemic. According to the shipping schedule, shipping is expected to arrive in Hong Kong one after another in July, and the overall domestic mineral supply is expected to continue to increase month-on-month, reflected in processing fees, which have recently recorded an increase of about 100m / t. With the passage of time, the shortage of mine supply will gradually ease and continue to tilt towards oversupply. 2) in terms of smelter output, with the rebound of zinc prices and processing fees, smelter profits are gradually repaired, while domestic refineries basically carried out a round of maintenance in the first half of the year, and the equipment is operating normally, under this expectation, as long as the profit level is sufficient, smelter output will be maintained at a high level, and the output in July is expected to be repaired to more than 500000 tons. With the end of inspection and repair, domestic production still has room for further recovery. 3) the period from July to August belongs to the off-season of consumption limited by the natural conditions of the high temperature and rainy season in the south and the north, and there is no possibility of better than expected short-term consumption. According to the logical deduction of industrial product supply pricing, the fundamental performance of zinc is weak, which is more valuable as a hedge.

Second, due to the epidemic in 2020, the impact of the mine end is relatively significant. SMM has followed up the mines of overseas groups with a reduction of nearly 400000 tons. At the same time, due to the impact of the epidemic on cash flow, some investment plans have run aground, while the low zinc price lacks profit-driven. Some new and expanded mines have been delayed to put into production. SMM expects that the actual increment in 2020 will be only about 300000 tons, which is much smaller than the expected increment a year ago. That is, zinc also needs to be repriced in the face of the fundamentals of epidemic reshaping. As far as non-ferrous varieties are concerned, at present, only zinc and nickel have not returned to the previous price level, that is, the possibility of underpricing of zinc constitutes the motivation to buy.

SMM believes that: direction deviates from two sets of logic coexist, zinc price trend depends on the choice of funds, boosted by macro optimism, hot money continues to pour into the market, shorting pressure is greater, today is in the early stage of zinc price breakthrough, SMM recommends careful wait and see, focus on whether the main zinc can stand firm at the Qianqi level, and cover the possibility of 17400 yuan / ton above the gap.

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