SHANGHAI, Nov 3 (SMM) - The most-traded SHFE zinc contract hit its highest since September 2007 on October 18 after consolidating for nearly three months, but subsequently pulled back. As of October 29, the most-traded SHFE zinc contract closed at 23,470 yuan/mt, up 525 yuan/mt or 2.29% within the month.

The average price of SMM 0# zinc ingot was 23,580 yuan/mt as of October 29, an increase of 650 yuan/mt or 2.83% from the beginning of the month.

Mining: In 2021, the domestic zinc concentrate market maintained a tight balance. According to SMM survey, the operating rates of domestic zinc concentrate enterprises have increased steadily since March 2021. However, as import losses continue to expand, the current import volume is mainly under long-term orders. Some mines in Inner Mongolia have reduced or halted production due to the power rationing, which has heightened the shortage of zinc ore. The TCs of domestic zinc concentrates have been falling since the end of September and are unlikely to rebound in Q4.

Smelting: According to SMM survey, some smelters have resumed production. SMM predicts that the output of zinc ingots will be around 501,000 mt in October and will recover to around 510,000 mt in November, but is unlikely to return to the peak level in the short term.

Imported zinc ore: Growing import losses hindered the inflows of imported zinc ore in October, and smelters favoured domestic zinc ore. With consideration into the shipping period and long-term orders, SMM estimates that the import volume of zinc concentrates in October may be around 270,000 mt. The import volume of zinc concentrates is expected to increase month-on-month in November. Inventory According to SMM data, the stocks of zinc ingots in seven major regions in China have been declining since March 15 when they refreshed their highs since April 20, 2020. As of October 29, the total inventory of zinc ingots in the seven major regions was 143,600 mt, a decrease of 121,800 mt or 45.89% from the previous high.

Downstream sectors:

Galvanised plate/sheet: During the traditional off-season in the third quarter of this year, galvanising companies were affected by rising steel prices, sluggish downstream demand and falling profit. Frequent extreme weather, such as typhoons and floods, severely hindered outdoor construction. Investment in real estate and infrastructure, which are the two big drivers of galvanising consumption was insufficient, which dragged down the overall operating rates of galvanising companies, who reported high level of finished product inventory. The pandemic and power rationing at the end of Q3 made demand even worse in October, which should have been the traditional peak season. In the fourth quarter, the sharp decline in steel prices dampened the buying interest of end-users. However, considering the strong resilience of consumption, it is expected that consumption will recover after commodity prices stabilise.

Die-casting zinc alloy: Rising zinc prices affected end consumption, causing the overall operating rates of die-casting zinc alloy producers to decline. However, incentivised by the high prices of zinc, the output of smelters and their alloy plants increased.

Zinc oxide: In October, the operating rates of zinc oxide enterprises showed an overall downward trend. The power rationing on end-users led to sluggish new orders. The biggest challenges for overseas smelters in November remain the European electricity prices and operations of smelters. Based on the current zinc price, the losses of European smelters have expanded to around $200/mt. In the future, we will pay attention to whether there will be new adjustments in the production of smelters. On the other hand, zinc stocks in Europe continue to fall. Under this circumstance, the European spot premiums habe risen to $200/mt, creating an opportunity for a short squeeze on the LME. On the whole, the market situation overseas still provides solid support for zinc prices, and there is little room for LME zinc prices to fall further. Regarding SHFE zinc, power rationing in Inner Mongolia affected production at local mines, leading to a rapid decline in supply in November. Some zinc ingot smelters have resumed production. The output of zinc ingots is expected to be around 501,000 mt in October and is expected to recover to around 510,000 mt in November, but is unlikely to return to the peak level in the short term. SMM believes that the resilience of consumption will gradually appear once the market sentiment stabilises. Inventory will not grow further without additional supply from the National Food and Strategic Reserves Administration (NFSRA).

SHFE zinc is expected to move between 22,800-25,000 yuan/mt in November with support from the fundamentals.