Short Zinc Supply with Low Inventory Rattled the Market, and Consumption Elasticity Determines the Market Orientation in August

SHANGHAI, Aug 8 (SMM) – In terms of LMC zinc, the impact of energy crisis on smelting extended, and electricity prices still hovered at high levels. On the demand side, as the overseas economy is expected to sink into a recession, the market demand is sluggish, and the LME destocking gradually slows down. The overall demand is expected to be stable, which will have an impact on the inventory. Last week LME inventories in Europe and the United States hardly saw an upward trend under the great impact of short supply, and at the same time the demand has not yet entered a real recession. Therefore the LME zinc cash-to-three-month contango remained at a high level and once neared $200/mt. Extremely low inventories created a market highly sensitive to changes in supply, so after Glencore revealed that it had cut its production since last year under energy pressure, the zinc prices fluctuated violently in the short term. But on the second thought, the production cut actually took place last year, and Glencore did not mention further reductions in production in the future, so it is doubtful whether the zinc prices will rise further. In the future, SMM will continue to track whether the overseas energy crisis will induce further reduction in the production of the smelters. Generally speaking, market players are suggested to be cautious and stand on the sidelines. LME zinc is expected to move between $3,200-3,600/mt this week.
In terms of SHFE zinc, the social inventory of zinc ingots dropped 61,000 mt in July, and at the same time, the finished product inventory of smelters and the raw material inventory of downstream enterprises both declined slightly. The main reason behind the accelerating fall in inventories was the low supply. The domestic refined zinc production fell 13,000 mt on a monthly basis to 475,900 mt in July. In August, the output of refined zinc is expected to reach 511,000 mt, up 35,000 mt from the previous month. The growth is less than expected, mainly due to the maintenance or production control of some smelters. As for import and export, after the SHFE/LME zinc price ratio dropped, importing or exporting zinc ingots was unlikely. The only focus is the inflow of zinc ingots from Russia. In terms of consumption, ferrous metals, glass, cement and other commodities all show signs of improvement in fundamentals recently, indicating that the peak season will extend from August to September. When it comes to galvanised plate sector, the increasing operating rates are more likely to occur tailing the growing terminal demand for restocking after prices stabilised. It remains to be seen whether the orders will sustain the upward trend. On the whole, assuming the market will be optimistic and ignoring the imported zinc ingots from Russia, SMM believes that there will be a shortage of 30,000 mt in August, and the social inventory of zinc ingot will approach 100,000 mt. The price spread between the front-month and next-month contracts is expected to stay strong, and the traders are suggested to be cautious. The SHFE zinc prices are estimated at 23,300-25,100 yuan/mt this week.