Guangdong inventory approaches peak levels in nearly three years! How will spot premiums/discounts trend going forward?

SMM October 22 News:
According to SMM data, as of October 21, inventory in Guangdong reached 53,400 mt, approaching a three-year peak, and the supply-demand imbalance has become prominent in the short term. How will premiums and discounts in Guangdong evolve going forward?

First, looking at the current domestic fundamentals:

Supply side, some smelters in Guangxi and Hunan completed maintenance and resumed production in October, driving a rebound in domestic refined zinc supply. SMM estimated domestic refined zinc production would reach 622,700 mt in October, up 22,600 mt MoM, with overall supply relatively loose. However, rising prices of recycled raw materials pushed up smelting costs, coupled with a pullback in sulfuric acid prices in some regions, creating uncertainty over whether subsequent production can be released as planned.

Demand side, Guangdong is home to a large number of die-casting zinc alloy plants and a small number of galvanizing enterprises. As two major segments accounting for a significant share of zinc consumption, the operating rates of die-casting zinc alloy and galvanizing in South China both fell short of the same period last year in September, down 2.75 percentage points and 6.14 percentage points YoY, respectively.

Looking ahead, the subsequent trend of spot premiums/discounts in Guangdong will mainly be influenced by the following two variables.

First: Can zinc ingot exports increase significantly to support premiums/discounts? Although the export window for zinc ingots opens intermittently, actual exports remain low. If the SHFE/LME price ratio continues with LME outperforming SHFE, the export window is expected to remain open, and zinc ingot exports may increase significantly, which would provide strong support for spot premiums/discounts in Guangdong.
Second: Can trade-in subsidies boost consumption recovery? The fourth batch of trade-in subsidies has been officially distributed. However, based on current market feedback, short-term consumption recovery lacks sustainability—last week’s rebound in the operating rate of die-casting zinc alloy was mainly due to enterprises resuming production and short-term procurement driven by falling zinc prices, rather than a substantial improvement in end-use demand.

Moreover, traders' willingness to sell is also a key factor influencing the movement of premiums and discounts: currently, spot premiums/discounts remain persistently low, compressing traders' profit margins, and some traders in Guangdong have opted to temporarily hold back on sales; if the reluctance to budge on prices spreads, the circulation of spot cargo in the market may decrease, potentially alleviating the downward pressure on premiums and discounts.

In summary, in the short term, the spot premiums/discounts for zinc ingot in Guangdong are unlikely to reverse the overall weak trend, primarily because the supply-demand pattern characterized by "high inventory + weak demand" has not seen substantial improvement. However, it is important to note that recent inventory has shown signs of decline, and traders are holding back sales due to low premiums/discounts, with a growing reluctance to budge on prices. These two factors will limit the room for further declines in premiums/discounts and may even lead to a phased, slow, and modest rise. Going forward, close attention should be paid to inventory changes in the Guangdong region. If inventory continues to decline alongside marginal improvements in demand, it could serve as a key signal for the shift in the trend of premiums/discounts from "weak" to "stable."