Eyes on the Near-term Inventory Change, and Refined Zinc Output Increase in the Future will Weigh on Zinc Prices

SHANGHAI, Oct 17 (SMM) - In terms of LME zinc, during the National Day holiday, the US non-farm payrolls data was released in excess of estimate, and the unemployment rate also unexpectedly dropped. As a result, the market increased the expectations for aggressive rate hikes and continued to price in a possible recession. This constituted the largest obstacle preventing zinc prices from rising higher. However, there was growing market concerns over supply as the conflict between Russia and Ukraine escalated. Glencore's Nordenham zinc smelter in Germany planned to be closed for maintenance from November 1 due to energy crisis in Europe. As of October 14, a total of 830,000 mt/year of overseas zinc smelting capacity was affected. Generally speaking, the supply and demand in the overseas market were both in a downside trend, but the market still set prices based on the potential economic recession. LME zinc is expected to trend lower and moved between $2,800-3,100/mt.

In terms of SHFE zinc, as the inventory stayed low after the holiday while the open interest was rather high in October, the spread between SHFE 2210 and 2211 contracts expanded sharply, hitting a record high. However, the large spread, together with high premiums and high zinc prices, resulted in extremely low willingness to purchase among downstream buyers. In the end, the spot premiums were lowered, and traders and smelters began to prepare for SHFE 2210 delivery. As of October 14, the open interest of SHFE 2210 zinc contract still stood at 7,430 lots. At the same time, Jushen warehouse in Guangdong and warehouses in Tianjin all reached full storage, which suggested that the SHFE deliveries this week will be high. It also implied that the capitals manipulated the ostensible rapid drop in inventory in September, but in fact created more invisible inventory. As such, the consumption in September was actually not as thriving as it seemed. It should be pointed out that the refined zinc output in October cannot achieve the expected level because some smelters were under routine maintenance or disturbed by equipment failure. The estimated output is merely 520,000 mt. If the following consumption picks up and the inventories keep falling, then a short squeeze is still possible for both SHFE 2211 and 2212 contract. When all smelters resume normal production after November and even ramp up the production to pursue high profits, the refined zinc output is likely to be elevated to about 540,000 mt, bringing high inventories. On the whole, the conflict between supply and demand is still prominent in the short term. But in the long run, the release of refined zinc output stimulated by high profits will contain the growth of zinc prices. SHFE zinc prices are expected to continue fluctuating between 23,000-25,000 yuan/mt in the short term.