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Analysis
Despite the softer dollar index this morning, the base metals had a mixed start in the new trading week. LME tin bucked the trend, gaining 1.75% after Friday's knee-jerk sell-off although the price is still below the psychological price level of $19,000 per tonne. Its peers are struggling, with aluminium, zinc, lead and nickel hovering near last week’s lows. Sentiment is somewhat cautious overall - the market focus is turning to the G20 summit in Argentina over November 30-December 1 for further clues on the simmering US-China trade dispute. The LME zinc price is 24.5% below the opening price of 2018. Key global mine restarts and ramp-ups increased the prospect of rising global mine output, threatening the bull run off the 2016 low. But other macro influences also played a major in sending the price lower. These include the US-China trade war, a rapid slowdown in Chinese economic growth and the strong recovery in the dollar index after its 2018 low in February. While the macroeconomic backdrop remain challenging, there are signs that LME zinc’s micro-dynamics have turned mildly positive. Falling global stocks have so far failed to provide much respite. LME zinc stocks are down 44% from the end of 2017; over the same period, SHFE stocks are 48% lower. Combined stocks are down around 37% for the year. More mine output is due to enter the global supply chain but the process has been fairly slow - global refined output continued to show sign of struggle. The lag in supply has helped shift the market balance - the global refined zinc market was in a deficit of 305,000 tonnes over January-September. While this is lower than last year’s deficit of 398,000 tonnes, it is still provides a rather bullish backdrop. The International Lead and Zinc Study Group (ILZSG) now estimates the global deficit in refined zinc to reach 322,000 tonnes by the end of the year and to contract only to 72,000 tonnes in 2019. But physical business remains fairly muted, reflecting the bearish mood, which is also affecting long-term contract negotiations. European zinc premiums for 2019 could decline by $10-15 per tonne from last year’s concluded level of $138-145 per tonne for duty-paid fca special high-grade zinc, according to preliminary indications. Meanwhile, global zinc premiums in key trading regions are unchanged amid limited spot demand interest. Part of the reason is that market participants have decided to stay on the sideline while the backwardation in the LME cash/three month spread continues to widen - it was recently at $94.50 per tonne. The European market remains well supplied but no participant seems able or willing to deliver enough tonnage to collapse the backwardation, according to Fastmarkets MB's latest global zinc wrap. Conclusion As the daily chart shows, attempts to rebound have had little success, with any gains quickly eroded by the fear that the US-China trade dispute could escalate. While LME zinc’s fundamental backdrop looks mildly encouraging, the prospect of rising mine and refined output in 2019 is fairly daunting. But an improved macroeconomic outlook could nullify the bearish view. |
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All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.
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