FOCUS: SHFE zinc stocks hit 10-year low on bargain hunting after prices fall

SHFE zinc inventory stood at 58,016 tonnes on Friday July 13, the lowest since February 1, 2008. A net 38,941 tonnes of refined zinc has been withdrawn from SHFE-registered warehouses in just one month.

“Although July is not the peak procurement season for zinc, prices are attractive now. We have seen more inquiries from downstream users,” a zinc trader said.

On January 29, the SHFE zinc price touched 27,030 yuan ($4023) per tonne, the highest level seen this year. Since then, it has slid by 22.3% to close at 21,010 yuan per tonne on Wednesday July 18. During the same period, the London Metal Exchange three-month zinc price also lost 26% to close at $2619.5 per tonne on Wednesday.

While the lower zinc prices have attracted buying activity, they have also had an impact on smelter profitability and operation rates. Falling refined zinc prices have stretched the margins of Chinese smelters even thinner, eventually prompting major producer Dongling to call for a 10% production cut across the industry in late June to support prices.

Various zinc smelters have extended their maintenance plans to reduce output and avoid inventory build-up.

“It is not profitable to operate now. Some cash strapped smelters in Shaanxi province have already curbed their output. For many others, activities are also low due to environmental inspection checks. Plenty of expansion plans this year are now halted,” a smelter source based in Southern China said.

This has resulted in a reduction in zinc stocks on the SHFE. The source expected a year-on-year drop of 150,000 tonnes of refined zinc output in China this year. Last year, China produced 5.85 million of refined zinc, according to the International Lead & Zinc Study Group.

With local output expected to run lower, buyers have turned to overseas suppliers for zinc ingots.

“There is no doubt that China is in a zinc shortage after the drop in output. We have received more inquiries on a cif China basis in recent days,” a Shanghai based trader said.

The arbitrage window has largely remained open in July, making refined zinc imports profitable. As of Wednesday July 18, importers stood to gain 296.85 yuan from bringing one tonne of zinc into China.

Usually stock will be withdrawn from the bonded zone to the Chinese market when the arbitrage window is opened – typically when demand for zinc imports is stronger. However, limited movement has been seen so far.

“A large quantity of Shanghai bonded zinc stock is now in a major commodity house’s hands. It does not allow a massive stock outflow,” a zinc analyst said.

Metal Bulletin assessed Shanghai bonded zinc stock at 156,000-161,000 tonnes as at the beginning of July, compared with 207,000-209,000 tonnes a month ago.

Additional reporting by Hui Li in Shanghai