Zinc Prices Plummeted in July: What to Expect in August? [SMM Analysis]

As of July 31, the most-traded SHFE zinc contract closed at 22,840 yuan/mt, down sharply by 1,825 yuan/mt MoM, a decline of 7.40%. At the beginning of July, SHFE zinc briefly rose to a high of 24,935 yuan/mt, then continuously fell, reaching a low of 22,360 yuan/mt by the end of the month. What were the reasons behind the decline in zinc prices in July? Can prices rise again in the future?

Macro Perspective. At the beginning of the month, U.S. manufacturing and factory orders data fell short of expectations. Coupled with the June ADP employment data recording the smallest increase since January 2024, a series of weak economic data strengthened market confidence in rate cuts. Subsequently, some investors chose to take profits at high levels, and market concerns about global zinc consumption intensified, leading to continuous exits of long positions and a decline in LME zinc prices. Domestically, the market's positive expectations for the Third Plenary Session were unmet, weakening macro sentiment. Combined with the impact of the overseas futures market, SHFE zinc prices also fell throughout July.

Supply Side. In July, SMM refined zinc production recorded 489,600 mt, a significant MoM decrease of 56,000 mt, with domestic zinc ingot production declining more than expected. Additionally, although the import window for zinc ingots opened, due to factors such as shipping schedules, July's imported zinc ingots were mainly long-term orders, making the supply increase less noticeable. Overall, zinc ingot supply decreased significantly in July. Although zinc ingot production is expected to remain stable in August, with continued declines in zinc prices and TCs, smelting losses may further expand, potentially increasing smelters' willingness to cut production. Attention should be paid to the subsequent inflow of imported zinc ingots and the operational status of smelters.

Consumption Side. July is the off-season for downstream consumption, with high summer temperatures leading some enterprises to choose staggered production, shortening production times. Additionally, heavy rains and floods in several provinces in south China affected outdoor construction projects. Furthermore, with ferrous metals prices continuously declining throughout the month, the market's "buy on the rise, not on the fall" sentiment impacted some galvanizing orders. The automotive and home appliance sectors also entered a production and sales off-season, leading to frequent maintenance and shutdowns among downstream zinc enterprises. The off-season trend is expected to continue in August, with no significant improvement in downstream zinc operations and no noticeable increase in zinc ingot demand.

Social Inventory. As of July 29, inventories in seven regions (Shanghai, Tianjin, Guangdong, Jiangsu, Zhejiang, Shandong, and Hebei) totaled 159,100 mt, a decrease of 35,500 mt from the end of June's 194,600 mt. SMM believes that the significant decline in July's inventory was due to both smelter production cuts and downstream restocking at low prices, with actual consumption still in the off-season.

Overall, in July, there were concerns about economic recession and weakened macro sentiment. However, significant production cuts at smelters due to tight ore supply and a substantial decline in social inventory still provided support for zinc prices. Attention should be paid to the subsequent improvement in domestic consumption.