Both Domestic and Overseas Zinc Supplies are Disrupted, Influencing LME and SHFE Zinc Prices

SHANGHAI, Aug 22 (SMM) - In terms of LME zinc, the zinc prices experienced surge and plunge last week. With energy issue further aggravating, Trafigura announced that it planned to close its zinc smelter in Budel from September 1. The to-be-closed smelter has a production capacity of 300,000 mt/year, and its previous operating rate was 50%. The zinc prices fell back rapidly after hitting highs as the market digested the news. The fluctuation of LME zinc differed greatly from the situation of the same period last year, which also reflected that the background had changed completely. Amid overseas recession, the supply could allow certain price elasticity to LME zinc, but it was impossible to sustain the rise because the surge of LME zinc entails two conditions. First, the overseas supply shall continue to be affected, and more production capacity is affected following the subsequent production suspension of smelters. Second, LME inventory shall continue to decline rapidly amid short supply. For example, the stocks of LME warehouse in Southeast Asia are transferred to the European market. Overall, the overseas supply still faces relatively great risks, so LME zinc is expected to remain rangebound at highs. LME zinc prices are estimated to move between $3,400-3,700/mt this week.

In terms of SHFE zinc, the domestic supply was also disrupted. The power rationing in Sichuan, Hunan, Shaanxi and Inner Mongolia compelled smelters to halt the production for 1-10 days. SMM estimates that the affected production might amount to 10,000 mt. At the same time, it should be pointed out that the power rationing is likely to extend if the water of reservoir remains insufficient amid continuous scorching weather. The contraction of the supply remains the biggest risk in the future. On the consumer side, the demand was weak, and the operating rates of galvanising plants also dropped slightly. As for the trend of consumption in the future, it is fortunate that the liquidity had been injected into the market in the early stage. Although the real estate sector remained sluggish due to a lack of market confidence, there were signs of improvement in the infrastructure sector, which was reflected in the production resumption of small galvanised zinc structural part producers.  At the same time, it remains to be seen whether the consumption is gone forever or will recover in the future as it is now suppressed by high temperatures. On the whole, SMM believes that there is still an upward room for consumption. The chances are that the domestic destocking will continue, and spot premiums will expand, and SHFE is unlikely to slump in the near future. It is expected that SHFE zinc prices will run at 24,000-26,000 yuan/mt in the short term.