SHANGHAI, Apr 18(SMM) -

High zinc prices & pandemic → weak downstream consumption → increasing social inventory → low price ratio, the open of export window → de-stocking of social inventory 

The demand in the market was unable to support the high zinc prices as the supply did. First of all, the weak consumption has slumped under the impact of the environmental restrictions during the Winter Olympic Games and the Two Sessions after CNY, coupled with the sharp rise of raw material prices. The resurgence of the pandemic in March led to strict prevention and control measures nationwide, depressing the labour market and production of enterprises. As the pandemic prevails, some enterprises were forced to reduce or stop the production due to the transport restrictions of raw materials and finished products. Moreover, the high prices of ferrous products and zinc have scared off the terminal companies. With less orders from customers, the orders of small and medium-sized enterprises which lack of competitive strength have flowed to large factories, and the production enthusiasm reduced due to the squeezing profits and moderate TCs. The weak consumption has led to increases in domestic inventory. But the export window has opened temporarily in March under the low price ratio. According to SMM research, some traders have exported to Singapore in March. The export window has also opened briefly in April, and some traders in east China, north China and south China markets sourced goods for export. But due to the difficulty of shipping and many arbitrage positions in overseas market, the actual exports have not yet been made. It is expected that the exports may help to reduce the increasing domestic inventory caused by the weak consumption after the maritime transport improves, and the domestic inventory will fell sharply by then. SMM holds an optimistic attitude towards export expectations and domestic consumption after the pandemic. Most enterprises have orders in hand and will be able to resume the production soon after the improvement in the pandemic and transportation. By far, orders from iron towers, photovoltaics and transportation sectors are stable, and the consumption in the infrastructure construction sector is estimated at 14.8 trillion yuan, which, coupled with a series of corporate-level financial support such as country's RRR cut, which will provide strong support for future consumption.

In summary, although the overseas energy crisis has a strong push on prices, and LME inventories have experienced significant de-stocking, the proportion of LME zinc cancelled warrants has risen rapidly to over 60%, with longs entering the market in a concentrated manner in batches. There is a certain risk of short squeeze in overseas market. But compared to other non-ferrous metals, the fundamentals of domestic zinc still offer strong support for prices. There are signs that the domestic market has shifted its main focus to the turning point of the pandemic. With the gradual resumption of national transportation, the backlog of orders in the hands of enterprises may increase sharply in the short term, leading to a fast decline in inventory and thus supporting zinc prices. However, whether the consumption will be resilient or not remains to be observed. SMM expects that LME zinc will still outperform SHFE zinc in the short term. Domestic zinc prices will follow the upward trend of LME zinc and may hit a high in May or June in 2022. Considering the impact of the LME nickel event and the high zinc prices, it is not recommended to chase long and is better to wait and see.