SHFE and LME Zinc Are Facing Different Fundamentals

SHANGHAI, Apr 14 (SMM) - The current zinc prices at home and abroad are guided by completely different fundamental directions. The overseas prices are dominated by energy, while the prices in the Chinese market are mainly guided by the pandemic. The fundamentals in overseas and in China have great uncertainty, which greatly aggravates the risk of zinc trading. This section will discuss them separately.

In the overseas market, the Russia-Ukraine conflict triggered a sharp rise in energy prices in the world except for Russia. The electricity prices in various western countries rose along with the soaring natural gas prices in Europe. Take France, Belgium and the Netherlands, where the three smelters of Trafigura are located, as an example, the local electricity price was 200 euros/MWh. Calculated by the concentrate TC of $150/dmt, and LME zinc prices of $4,200/mt in Europe, the local smelters still had a loss of about $40/mt. Meanwhile, the potential power shortage in European countries hindered the smelters from resuming the production (unless the countries’ governments introduce direct subsidies to energy-intensive enterprises, such as Auby smelter in France). It is no surprise that Trafigura is withdrawing zinc stocks from the warehouse of LME on a large scale to make up for its supply gap caused by the production reduction in Europe, hence the destocking of LME inventory speeds up and the cancellation of warrants increases. In addition, the overseas long positions are concentrated, and there may be a short squeeze in the future, which will support the zinc prices. At the same time, Teck Resources signed an annual zinc concentrate contract, and the treatment charge was raised by 45% to $230/dmt. The company also signed an automatic adjustment clause: when the zinc prices exceed $3,800/mt, 5% of the exceeding part will be shared with the smelter (the same as the 20% and 80%-share mechanism in China). The prices show that when Europe reduces its production and China refuses to purchase the imported zinc ore, the shortage of overseas ore becomes a surplus. In the future, the market shall pay attention to whether the TCs in Europe will rise further to alleviate the cost pressure of smelters under high electricity prices, so as to resume the production when time allows. On the whole, the overseas market remained strong. LME zinc prices will be bullish before the smelters resume the production.

In the Chinese market, the smelters refused to purchase imported ore as the SHFE/LME price ratio was falling, which aggravated the shortage of zinc ore in China and affected the output of zinc ingots. According to SMM research, due to the reduction of production or shutdown of some smelters, the output of refined zinc was 501,300 mt in March and 503,600 mt in April, which were all lower than the previous expectations. The weaker supply intensified the poor demand. Downstream sectors of zinc were affected by the pandemic to varying degrees, which will be analysed in detail in the following downstream consumption section. Due to the unclear situation of the current pandemic, consumption will drop by about 10% in April. However, the weak consumption expectation is offset by the export expectation. In the Shanghai spot market, importers received goods after the import window opened. However, due to the pandemic outbreak, the imported goods could not be reflected in the market, which will be transmitted in two ways in the future. 1. Traders lock in the price ratio after the window is opened. If the price ratio is repaired during this period, the position will be sold to gain profit. If there appears a short squeeze overseas, it may hit the reverse arbitrage operations. 2. If the price ratio is not locked. The market waits for an opportunity to export to the European market for sale or to deliver to the Southeast Asian market. If the export volume is large, it will decrease the domestic stock, which will aggravate the market shortage after the pandemic, and also provide the opportunity for the domestic spread between the front-month and next-month. On the whole, it is not time to for reverse arbitrage operations when the overseas market is stronger. SHFE zinc prices will continue to follow the overseas prices.

Potential risks: 1. Overseas energy 2. Overseas short squeeze 3. Resumption of production of smelters in Europe 4 The pandemic in China