The strong dollar index and generally risk-off sentiment continue to plague zinc; its rising LME and SHFE inventories have also weighed. SHFE stocks are recovering - there was fresh inflow of 6,841 tonnes in the week to June 15. At 96,957 tonnes, plenty of metal is available while consumers are well stocked and in no hurry to restock. The highly anticipated boost in second-quarter demand failed to materialise.
Chinese demand for zinc concentrate remains low while cash-strapped Chinese zinc smelters continually cut capacity utilization rates, perhaps until they see higher zinc prices, which seems unlikely in the near term. Lower demand has help ease the previous tightness and push treatment charges (TCs) to increase to their highest level in May. As well, Chinese apparent demand was limited after the arbitrage window shut - the import loss stood at $24.80 per tonne on June 11.
More metal has arrived in LME-listed warehouses in New Orleans this morning, with 1,525 tonnes easily offsetting 250 tonnes of outflow, listing LME stocks to 247,450 tonnes. Over-eager zinc bears continue to influence a ballooning backwardation in LME price spreads, betting prices will drop further. Its cash/three-month spread is in a backwardation of $42.00 per tonne.
Still, there is no sign of a dominant warrant holder to suggest that zinc is in tight hands. Instead, the metals booked removal remains at a low 8,925 tonnes. As well, the 236,450 tonnes of on-warrant metal suggest that there is plenty around for lending purposes.
LME zinc is also vulnerable on the speculative front even though its net long fund position (NLFP) rose 185 lots to 58,940 lots in the week to June 15. The fourth consecutive week of gains reflect rather bullish sentiment among specs but the recent price weakness could put downward pressure on zinc’s elevated NLFP.
The weekly zinc chart (shown) highlights why LME zinc is at a key juncture. A solid break below $2,985 per tonne could open a fresh trading range of lower prices. With no sign of strong buying momentum in 2018, downside pressure is winning for now.
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All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.