Short term
Medium term
Long term
R1 2,520 50% Fibo rally from 2016
R2 2,556 100 DMA
R3 2,572 20 DMA
R4 2,578 40 DMA
2,712 DTL from YTD high
2,894 200 DMA
S1 2,894 200 DMA
S2 2,980 Feb 2017 high/mid-Sep
S3 2,718 Jul 2017 low
S4 2,578 40 DMA
S5 2,572 20 DMA
2,556 100 DMA
2,520 50% Fibo rally from 2016
2,283 Aug 2018 low
Trending higher

BB – Bollinger band
DMA – daily moving average
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

  • The London Metal Exchange three-month zinc price is attempting to rebound after finding support ahead of $2,500 per tonne.
  • Momentum indicators appear more constructive - the stochastics are trending higher. The 40 DMA has crossed above the 100 DMA and the 55 DMA is set to follow, thereby creating a bullish golden cross.
  • But the upper shadow currently visible on today's daily candlestick implies overhead selling pressure has emerged.
  • Zinc needs to vault immediate resistance from the 100 and 20 DMAs at $2,556 per tonne and $2,572 per tonne respectively to regain positive momentum. But it still faces overhead resistance from the DTL formed from the year-to-date high at $2,712, above which stands the 200 DMA at $2,894.

Macro drivers
LME warehouse stocks are trending lower - they total 131,325 tonnes, down from 256,175 tonnes in mid-August. Removals accelerated to average 2,669 tonnes per day in September-October from 1,124 tpd in August. Additionally, the tightening of nearby spreads has so far attracted only limited inflows - the LME’s cash/three-month zinc spread was recently at a backwardation of $66.50 per tonne.

China's refined zinc production totaled 4.14 million tonnes in January-September 2018, down 2.6% year on year, according to the latest data from China's National Bureau of Statistics. Shanghai Futures Exchange zinc stocks totaled 37,378 tonnes on November 9.

Falling visible stocks could start to create some pressure for physical premiums. The premium for special high grade (SHG) zinc ingots in northern Europe has rebounded from an eight-year low on reduced warehouse stocks, while the SHFE-LME import arbitrage reopened last week.

Still, various new and restarted mine project are set to boost mine production significantly. The first zinc concentrates have been shipped from the Century mine in Australia and spot treatment charges (TCs) increased to $120-140 per tonne cif Asia-Pacific at the end of October, up sharply from $20-40 per tonne in June.

But downstream signals from the automotive and construction sectors, while supportive overall, have shown signs of slowing. In China, passenger vehicle sales dropped by 13.2% year-on-year to 1.95 million vehicles in October, contracting for a fourth consecutive month. 

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 supply 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 76,200-tonne deficit in August and is due to publish its latest monthly bulletin on November 14.

Falling zinc stocks as a result low utilization rates at Chinese smelters continues to limit downside pressure for zinc; however, the market remains reluctant to push prices higher amid expectations of rising supply while various mine projects ramp up. For now, though, we believe price risks remain skewed to the upside in the short term because tightness is likely to intensify.

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