SHANGHAI, Jul 15 (SMM) - In July, the expectation of an economic recession brought about by the potentially more aggressive interest rate hikes and inflation dominates the market. At the same time, recent events in Japan, OPEC and the UK have also aggravated the uncertainty of the future. Therefore, for the rest of July, the market shall pay attention to the following events. First of all, the overseas inflation. Secondly, will the US president Biden reach some agreement on crude oil, such as increasing the production, when he visits Saudi Arabia? Thirdly, the results of the Fed's interest rate meeting on July 28 and Powell's speech. In China, the attention should be paid to how the following economic policies will be set at the mid-year meeting of the Political Bureau of the Central Committee in July, and whether policy stimulus will be further enhanced.

On the fundamentals, overseas, the soaring electricity prices caused by the energy crisis still strongly support the fundamentals. In July, the electricity prices in various parts of Europe have soared to different degrees. The electricity prices in France, the Netherlands and Belgium, where the smelters affiliated to Nyrstar are located, are now 350-400 euros/MWh, which also reflects the electricity tightness in overseas markets.

Production and output of overseas mines cannot reach expectations due to factors such as labour shortage and pandemic situations. According to SMM statistics, the output of overseas zinc concentrate in 2022 will decrease by 11,200 mt YoY, so the path of raising profits of smelters by heightening the TCs becomes unavailable. The overseas smelters' losses stand at about $388-555/mt based on the zinc prices of $3,100/mt and real-time electricity price. SMM expects that European smelters will not resume their production recently, and the tight supply still underpins the overseas markets.

However, overseas consumption is also weakening. Although LME cash-to-three-month premiums once rose rapidly in June, there lacked active shipments. And the fact is that, the destocking speed in LME warehouse has slowed down significantly. On the whole, the market is still worried about the interest rate hikes in the future and the economic recession brought about by the inflation. LME zinc prices will remain rangebound at low levels.

In China, the supply and demand are both weak at present. Recently, domestic zinc prices were higher than overseas zinc prices and more resilient than other nonferrous metals prices because of the intensifying imbalance between supply and demand. However, the rapid decline in zinc prices greatly affected the smelters, and some small ones cut or suspended their production due to the losses.

Besides, the supply in the north and south markets diverged. In the south market, the imported ore supplemented the raw material inventories of smelters, thus the overall production was stable, and the TCs rose somewhat. In the north, smelters mainly used domestic ores with little interest in imported ores. In addition, the logistics and transportation problems also hindered the circulation of ore, resulting in the continuous shortage of zinc ore and the abnormal production of smelters. In July, China refined zinc output is estimated at 487,300 mt, below the 500,000 mt mark.

The recovery of consumers after the pandemic is not optimistic. The operating rates of the three major zinc downstream sectors did not improve, and the growth of orders was poor. At the same time, whether the repeated pandemic outbreak in Shanghai and other places will drag down the consumption again is plaguing the market. In the long run, the special bonds endorsed by the government has been issued ahead of schedule, and a large number of new projects have been launched in 2022, which indicates that the consumption this year will probably be released in August and September.

Under the backdrop of weak supply and demand currently, the highlighted imbalance on the fundamentals has accelerated the destocking of domestic social inventory, and it has also greatly expanded the spread between the SHFE front-month and next-month contracts. SMM thinks that there is no need to be overly pessimistic about the zinc prices in the short term. But in the long run, market players shall hedge appropriately at highs.

Risks: the uncontrollable inflation in the US; the uncertainty of crude oil prices centring the meeting between the US and Saudi Arabia; and the pandemic situation in China.