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Analysis
Equities remain under pressure on Thursday October 11 - follow-through selling continues after the sharp rout in US stocks yesterday amid increasing concerns of the negative effects of rising trade tensions between China and the United States. Supply cuts in China continue to create structural tightness in the short term; refined zinc production totaled 3.957 million tonnes in January-August 2018, down 6.6% year on year, according to the latest data from China's National Bureau of Statistics. Exchange stocks are falling; Shanghai Futures Exchange zinc stocks remain low at 29,204 tonnes. LME warehouses total 191,500 tonnes, their lowest since early in March. Removals accelerated to average 2,474 tonnes per day in September-October from 1,124 tpd in August. In addition, 30% of stocks are booked for removal. But nearby LME spreads have tightened - the cash/three-month spread was recently at $28.50 per tonne backwardation. But this has encouraged fresh inflows, increasing the total volume of metal delivered on-warrant so far this year to 264,700 tonnes. But downstream signals from the automotive and construction sectors, while supportive overall, have shown signs of slowing. Premiums in Asia dropped last week. Weak demand caused the LME-SHFE arbitrage window to close - the Shanghai cif premium dropped by 30% to $180-200 per tonne in the week to October 8 from $260-280 per tonne in the previous week. Spot market activity has been quiet while most market participants attend LME Week. Stronger freight and financing costs are likely to lift premiums in the US by around 25 cents year on year. The latest forecast from the International Lead & Zinc Study Group (ILZSG) is for the global refined market to record a deficit of 322,000-tonnes in 2018, up from the 263,000-tonne forecast it made in May. Despite rising mine supplies, it projects the market will remain structurally tight in 2019 at a deficit of 72,000 tonnes. The ILZSG pegged the refined zinc market in a 32,500-tonne deficit in July. But major mine projects, such as Vedanta Resources' Gamsberg mine and the restarted Century mine in Australia, have started production in recent weeks. Despite some delays, these and other projects,are starting to ease the tightness in the concentrate market. Spot treatment charges edged up to $115-135 per tonne at the end of September on a cif Asia Pacific basis from $80-95 per tonne a month earlier - their highest since May 2016. Conclusion Smelter closures in China continue to create structural tightness in the refined zinc market and draw on above-ground stocks. While strong dip-buying remains a feature, the markets appears reluctant to chase price higher while scaled-up selling continues to act as a cap. We maintain a modest upside bias in the short term while the tightness persists but the market will play close attention to third-quarter producer reporting, which could be the catalyst for more significant gains if there are delays in bringing new mine supplies to market, causing availability to tighten more than the market currently anticipates. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.
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