Cuts to Chinese zinc production are not enough to spur a substantial recovery in prices by themselves because a demand-driven response is equally important, Barclays Capital said.
In response to lower LME prices – three-month zinc is currently around $1,795 per tonne on the LME, sinking below $1,800 for the first time this month – Chinese zinc smelters have been cutting output , BarCap noted in a report on Wednesday.
According to the latest data from China’s National Bureau of Statistics, refined zinc production was down 10 percent in July on the same month of last year, the broker noted.
This has tightened the zinc market, leading to a drawdown in Shanghai Futures Exchange (SHFE) stocks. SHFE inventories have fallen 81,000 tonnes since mid-March, it added.
The market tightness combined with financing demand has help to drive physical premiums higher – Shanghai spot premiums are in the range of $120-130 per tonne on a CIF basis, up from this year’s annual contract premiums of $80-85 per tonne.
“This tightening of the Asian market has eroded the global surplus a little, though a clear and comfortable surplus does still exist,” it said.
Still, the surplus has also shrunk in line with improvements in demand – the latest ILZSG data shows an impressive 15-percent increase in North American demand in May and growth in European demand for the first time since April 2011.
“[Nonetheless], current market trends are not enough to support a recovery in zinc prices at the moment, for that there has to be a corresponding recovery in demand,” the broker said. “We expect that to develop later in the year as global growth momentum improves.”
“In our view, a non-China supply response is what’s needed to offer real and sustained downside support to prices,” it added.