Zinc: Consumption Likely to Increase as Macro Sentiment Turned Bullish

SHANGHAI, Aug 1 (SMM) - In terms of LME zinc, the US Fed decided to raise the interest rate by 75 basis points at its July monetary policy meeting. However, Powell hinted at the press conference that the speed of interest rate hikes might gradually slowed down. The relatively dovish speech triggered a bull market. In the future, the market's focus will be shifted to the economic data from August to September and the fundamentals of metals. On the supply side, the electricity prices in Europe were still increasing, and those in some countries have even risen beyond 500 euros/MWh. The cost pressure on the smelting side was still accumulating, but the number of smelters who suspended or cut production remained unchanged thanks to the support of fixed electricity prices with long-term orders. The low output on the supply side is expected to sustain, and the market players are suggested to watch for the potential energy crisis in the fourth quarter. On the consumer side, the inflation and interest rate hikes began to weigh on the Europe and the United States markets. The US GDP witness a negative growth in the second quarter, and many readings such as fixed investment and government spending appeared to be weak. The attention shall still be paid to whether there will be a substantial recession in the overseas market. On the whole, overseas market will extend the weak supply and demand, and the changes in LME inventory are worth attention. The prices of LME zinc are expected to move between $3,050-3,400/mt.

In terms of SHFE zinc, the recent concentrated inflow of imported ore increased the raw material stock of smelters. At the same time, SMM observed that departures of zinc concentrates from major overseas ports have risen rapidly to a new high in the year, therefore it is expected that imports of zinc concentrates will be maintained at a high level in August and September. The growth in imported zinc concentrates will bring about an increase in the output of refined zinc in the third quarter. The smelters in Inner Mongolia, Shaanxi, Sichuan and other regions that had restricted the productions due to zinc concentrate shortage are expected to have the production back to normal levels gradually. In other words, the production cut of smelters due to tight supply of zinc concentrates concluded. In the future, what needs to be considered is whether the losses will have an impact on the production. In the past two weeks, the prices of sulphuric acid dropped rapidly across the country, and the earnings from by-products at the smelting end shrank substantially. Under this circumstance, the smelters stuck to the TCs of zinc concentrates firmly, and the domestic TCs further increased by 100 yuan/mt to 3,800 yuan/mt last week. Accordingly, the cost of the smelters was between 23,000-23,500 yuan/mt. On the consumer side, as the commodity prices stabilised recently, the terminal demand also began to pick up with an increase in orders. However, the problems in the consumption sector remained unsolved, and no direct stimulus or measures to relieve the market were introduced at the meeting of the Political Bureau of the CPC Central Committee. It still remains to be seen whether the consumption will continue to grow. On the whole, the recent low inventory and high warrant concentration have triggered a short squeeze, and the price spread between the front-month and next-month contracts expanded. It is recommended that the traders wait and see. The zinc prices are expected to run at 22,500-25,000 yuan/mt in the short term.