Short term: Flat
Medium term: Flat
Long term: Flat
Resistances:
R1 $3,220 June 6 high
R2 $3,231 200 DMA
R3 $3,273 100 DMA
R4 $3,595.50 recent high
R5 $3,780 Jul 2007 high
Support:
S1 $3,141 50 DMA
S2 $3,000 psychological support level
S3
$2,970 May 4 low
Stochastics:
Mixed
Legend:

BB – Bollinger band
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
DTL – downtrend line
UTL – uptrend line
H&S – head-and-shoulder pattern
RSI – relative strength index

Analysis

  • London Metal Exchange zinc worked its way higher on Monday June 11, closing on a rather positive note with a bullish daily candle.
  • That said, the upside is capped by the June-6 high at $3,220 per tonne and buyers need to take this level out to unlock further gains.
  • The next set of overhead resistance lies at the 200 DMA and then the 100 DMA.
  • With the daily RSI and stochastic lines edging higher, we suspect that the buying momentum still has room to take LME zinc higher in the short term.

Macro drivers
After a mixed start to the trading week, base metals prices continued to consolidate this morning. The historic Trump-Kim summit has had a positive impact on risk sentiment after the talks in Singapore went well. Market focus now turns to US Federal Open Market Committee (FOMC) June meeting where the Federal Reserve statement will be highly scrutinized. The dollar index remains elevated and trades comfortably above 93.50 at the time of writing. Given tomorrow's risk event, we feel that market participants are likely to wait on the side-lines until the FOMC meeting is out of the way. 

The rebound in the LME zinc price, since the May low at $2,970 per tonne, is currently capped below the 200 DMA (see chart). Bullish momentum has stalled near $3,200 per tonne, which suggests the limited scope it currently has given the changing fundamental backdrop in the zinc market. 

Latest ILZSG data reported the global refined zinc market ran a surplus of 25,000 tonnes in the first quarter of 2018. Global production rose to 3.305 million tonnes, but the rate of consumption was only at 3.280 million tonnes so far. The surplus made the zinc complex far more challenging and justifies the current weakness. In fact, this is an early reflection of how quickly smelters can react with sufficient materials. 

Total LME stocks this morning dipped to 246,900 tonnes after an outflow of 1,550 tonnes. The nearby cash/three-month spread has tightened from yesterday's backwardation of $23.50 per tonne to $31 per tonne, but it appears stockists are in no hurry to relinquish their holdings. Furthermore, there is no sign of a warrant holder to suggest that metals are in tight hands. Instead, we think the tightening in the spread has triggered a short-covering rally for now. 

On the physical front, global zinc premiums in most regions were largely unchanged after the LME/SHFE arbitrage window re-opened. Most market participants are waiting for the arbitrage spreads to widen further and expect spot demand to pick-up eventually. Meanwhile, the recent recovery in the LME three-month zinc price is starting to discourage buyers, with some expecting further falls in price. Also, most users are well-supplied by long-term contracts, which perhaps has capped any uptrend on premiums.


Conclusion
Judging by its recent price move, LME zinc is in wait-and-see mode. A successful break above $3,200 per tonne and the 200 DMA could give buyers more confidence to continue higher. Given that the metal is still trading within an uptrend channel, we will remain with our bullish bias in the very short-term. 


Please click here for our zinc monthly spotlight.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.