Zinc Prices Likely to Rebound in May though with Limited Upside Momentum

SHANGHAI, May 17 (SMM) - The US Fed decided to raise the interest rate by 50 basis points at its May monetary policy. At the same time, it will officially start to shrink the balance sheet from June 1, which also means that the Fed's monetary policy has been fully tightened. Since the end of the meeting, non-ferrous metals prices have fallen rapidly from high, which is also due to the fact that the market transaction logic has shifted from tight supply to gloomy expectations of future economy and consumption. On the contradiction between strong fundamentals and shadowed macro expectation, the price volatility has been wild, and the risk of zinc price transactions has also been exacerbated. SMM will discuss zinc prices from both overseas and domestic perspectives.

In the overseas market, macro-level concerns dominated the market, and the sudden drop in overseas sentiment pulled down the zinc price from $4,000/mt to $3,600/mt. On the supply side, the old problems still existed, and the electricity price in Europe was high, sustaining the smelting cost at a high level. With the decline in zinc prices, European smelters suffered losses, and it is difficult to see smelters resuming the production from previous production suspension or reduction. As such, the supply remained tight. On the consumption side, LME inventory has dropped more slowly compared to April. Meanwhile, China's exported zinc ingots also began to be delivered to LME warehouses, and then LME cash-to-three-month backwardation narrowed, weakening market confidence on consumption. However, the current fundamentals remain strong, as LME inventory is still falling, and the European premiums kept rising in early May and remain at around $500/mt for the moment. On the whole, zinc prices still gain support from the fundamentals. However, under the circumstance that the market focus has changed, there is no further stimulus overseas. It is expected that LME Zinc prices will rebound, but are unlikely to return to the previous high.

In China, several factors are worth attention. 1. Ore supply was still in shortage. The average TC of zinc ore has dropped to 3,500 yuan/mt, while the TC in Yunnan has fallen to 3,300 yuan/mt, which has also raised the production cost of smelters. The cost support will be tested. 2. The recently rising SHFE/LME price ratio has led to the complete closure of the export window. Reverse arbitrage holders that plan to export before could pay off by closing the positions, so these zinc ingots may become visible inventory. As such, the market needs to pay attention to changes in domestic inventories. According to market sources, most of the zinc ingots have been set for ships and overseas warrants, and the export plan remains unchanged. 3. The rising price ratio, on the other hand, opens the import window on the mine end. Although the recent shortage of ores cannot be fully resolved, some smelters have already started to restock for the third quarter, which also means that the domestic zinc ingot output in the second half of the year will increase. 4. Only when the pandemic situation fully recovers can we expect the recovery of consumption and the introduction of consumption-oriented supporting policies. On the whole, strong driving forces are required to trigger further zinc price moves. Before that, there is an opportunity for zinc to rebound, but the strength will not be very strong.

Risks: overseas energy, LME inventory that begins to accumulate continuously, European smelters’ production resumption, domestic pandemic