A Short Squeeze May Occur Overseas Followed by the Domestic Market

SHANGHAI, Apr 11(SMM) -

For LME zinc: On the one hand, Teck Resources has signed an annual zinc concentrate contract with a 45% increase in TCs to $230/dmt. An escalation clause was included: if the prices of zinc exceed $3,800/mt, TCs will rise by $0.05/mt for every $1/mt increase in the prices of LME zinc, but if the zinc prices fall, TCs will remain unchanged (the same as the 20%/80% price sharing scheme in China). In terms of the prices, the supply deficit of overseas ore has turned to surplus amid production cuts of smelters in Europe and China's refusal to import. The market shall focus on whether the TCs in Europe will rise to ease the cost pressure on smelters under high electricity prices, so as to resume the production. On the other hand, European energy issues are still ongoing, resulting in the production cuts at smelters, which exacerbated the shortage of zinc ingots in Europe. The reason behind the sharp de-stocking of LME along with the increases in cancelled warrants was that Trafigura Group has picked up a large amount of zinc stocks from warehouses of LME to make up for the company's supply gap due to production cuts in Europe. Meanwhile we have seen a fairly high concentration of overseas long positions, which does not rule out the possibility of a short squeeze in the future. The fundamentals will still bring optimistic results before the resumption of production in Europe. LME zinc is expected to rise again, but in consideration of the great risks, it is recommended to wait and see, and LME zinc is expected to move between $4,100-4,500/mt.

For SHFE zinc, the lack of ore has finally affected the output of zinc ingots. According to SMM research, the output of refined zinc stood at 501,300 mt in March and is expected to be 503,600 mt in April, which was less than expected and was caused by the production reduction or shutdown at some smelters. The weak supply has exacerbated the consumption weakness, which is expected to be offset by exports. After the export window opened last week, exporters started to purchase in the spot market of Shanghai, but due to the pandemic, the export cannot be realised immediately. And there are likely to be two scenarios for market players in the futures. First, SHFE/LME price ratio is fixed once the export window opens. If the price ratio keeps improving, profits would be gained after closing the futures positions; but if there is a short squeeze in the overseas market, the reverse arbitrage operation may suffer losses. Second, SHFE/LME price ratio is unfixed, and the market would wait until the lockdown is lifted and export to overseas market when the export window opens. The spot can be sold in the European market or delivered in the Southeast Asian market. Large export volume will drive the domestic de-stocking and intensify the shortage of the market after the pandemic, which also provides a chance for the monthly spread. In general, SHFE zinc prices will continue to follow the fluctuations in the overseas market. It is expected that zinc prices will move between 26,500-28,000 yuan/mt in the short term.