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Analysis
Base metals prices were visibly weaker this morning while global investors digest the latest International Monetary Fund (IMF) report. The group cut its global growth forecast to 3.5% in 2019, warning that economic activity could fall short of expectations if trade tensions persist between the United States and China. It added that the risk to global growth has tilted to the downside, with risk sentiment vulnerable to a potential no-deal Brexit and a rapid slowdown in Chinese economy. The domestic Chinese zinc concentrate market should be in a surplus of 269,000 tonnes thanks to strong imports of 1.465 million tonnes, the largest in the last three years, Antaike reported. The imports are offsetting the fall in Chinese output to 4.172 million tonnes in 2018 from 4.3 million tonnes in 2017, highlighting that strict environmental inspections on illegal mines are proving effective. This meshes with the latest ILZSG data showing a decline in Chinese mine output in the first 10 months of 2018 of 6.7% from the corresponding period of last year. Chinese zinc smelters are still reluctant to bring back on stream fully shuttered capacity while the LME price remained depressed. The build-up in shuttered capacity has hit availability of refined metal - hence the low on-warrant stocks at SHFE-bonded warehouses. Antaike estimates the deficit in the domestic refined market at around 9,000 tonnes in 2018. Still, Antaike expects stronger mining and refined output - rising availability from domestic mines as well as restarts and ramp-ups of zinc mines outside China will play key roles. Consequently, treatment charges (TCs) will increase from levels that have been too low to persuade smelters to produce more refined metal. Fastmarkets assessed the spot concentrate TC cif China at $210-230 per tonne on December 28, up from $120-140 at the end of October. With TCs rising to new highs, Chinese smelters could reconsider a restart although most are still well stocked for now and fairly reluctant to bring back large-scale purchasing of zinc concentrates. But expectations of rising supply of refined zinc amid the current global uncertainties are questionable. US-China negotiations continue but the negative impact from their trade war has shown up in soft data. Weak Chinese apparent demand among galvanizers could last indefinitely; when combined with fragile domestic business confidence, the negative demand outlook for the metal could worsen.
Conclusion Some selling pressure has emerged this morning; we expect LME zinc to consolidate recent gains and retest key technical support at the 100 DMA. |
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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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