Zinc Prices Surge: How Are the Fundamentals? [SMM Analysis]

SMM, November 28: Recently, zinc prices have surged with a strong influx of bullish funds, achieving a three-day winning streak and breaking a new high for the year. The most-traded contract reached 25,860 yuan/mt, with an increase of nearly 3%. Given such a strong performance in zinc prices, how are the fundamentals?

Supply side, with the increase in zinc concentrate port inventory and the decline in smelter production in Q3, the tight supply of ore has been somewhat alleviated. Monthly TCs have risen slightly from a historical low of 1,400 yuan/mt (metal content) to 1,600 yuan/mt (metal content). Although there are expectations for production increase in overseas mines in the long term, the volume flowing into the domestic market this year is limited. Coupled with the impact of winter in the north in Q4, domestic mine production has decreased. Under the background of winter stockpiling, the overall supply of ore remains tight. As for smelter production, although there is an increase in Q4, it remains at a historical low of around 500,000 mt, providing bottom support for zinc prices.

Demand side, the end of Q4 typically marks the off-season for consumption, but recent domestic consumption has been slightly better than expected. In galvanizing, export orders have increased due to the anticipation of tariff adjustments, and orders for streetlight poles and profiles from countries like Japan and Australia have also risen due to project delivery cycles. Additionally, some domestic traders have stockpiled due to bullish price expectations, leading to increased procurement of galvanized pipes. Orders for square pipes have also increased due to the completion of northern projects and the peak season for agricultural greenhouses, with a slight improvement in overall operating rates. Furthermore, die-casting zinc alloy has also seen a "rush to export" situation recently, with overseas orders being stockpiled in advance, performing better than expected.

Inventory side, after the delivery period, social inventory quickly decreased by nearly 20,000 mt to less than 110,000 mt. Overall destocking has been good, and market consumption expectations have strengthened. If smelter deliveries are not timely, social inventory may continue to decrease. However, according to SMM, the large-scale destocking is partly due to regional inventory transfers, and although inventory has decreased, it remains at a three-year high.

Additionally, as zinc prices rise above 26,000 yuan/mt, coupled with the price spread between near-month contracts increasing again to 400-500 yuan/mt, spot cargo transactions have been somewhat suppressed. Downstream enterprises' purchasing enthusiasm has significantly declined, and end-user orders have also decreased. With the rise in zinc prices, smelter profits have generally increased, and with the intermittent opening of the import window in mid-November, refined zinc imports in December are expected to remain high. Zinc ingot supply may increase, and with supply increasing and demand decreasing, inventory may accumulate, which will suppress zinc prices.

In summary, the recent surge in zinc prices has been driven by strong bullish funds, with positions increasing by over 80,000 lots. Although zinc prices have reached above 26,000 yuan/mt, the fundamentals provide weak overall support. Future attention should be paid to macro risks and fund performance.