Outlook:  
Short term
(1-3M):
Up
Medium term
(3-6M):
Flat
Long term
(12M):
Up
Resistances:
R1 2,557 100 DMA
R2 2,558 40 DMA
R3 2,608 20 DMA
R4 2,670 200 DMA
R5
R6
2,728 Oct 2018 high
2,939 50% Fibo Feb-Jun down leg
Support:
S1 2,718 Jul 2017 low
S2 2,670 200 DMA
S3 2,637 DTL from Feb '18 high
S4 2,608 20 DMA
S5 2,558 40 DMA
S6

2,557 100 DMA
Stochastics:
Converging in high ground
Legend:

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











Analysis 
  • The London Metal Exchange three-month zinc price is consolidating on Tuesday February 5 after briefly touching a seven-month high of $2,808 per tonne.
  • Momentum indicators remain positive although they have begun to slow. The stochastics are converging in high ground while the RSI at 76 suggests prices are starting to look overbought.
  • Support is seen from the 200 DMA at $2,670 per tonne. The 55 DMA has converged on the 100 DMA; a positive cross above the longer term average would reinforce positive sentiment.
  • Resistance at the June 28 high at $2,931 per tonne coincides with the 50% Fibo of the February to August 2018 down-leg.

Macro drivers
LME stocks are at 112,500 tonnes on February 4, down from 130,425 tonnes on December 21. The backwardation in the LME’s cash/three-month spread was recently at $7 per tonne, which is likely to limit stock inflows in the short term. Fresh cancelations remain supportive - currently, 48% of stocks are booked for removal, up from 16% on January 18. 

Low utilization rates among Chinese smelters continue to create tightness in the domestic market. China's refined zinc production totaled 5.61 million tonnes in 2018, down 3.2% year on year, according to the latest data from China's National Bureau of Statistics. Shanghai Futures Exchange zinc stocks totaled 46,931 tonnes on February 1.

The International Lead & Zinc Study Group (ILZSG) forecast the refined zinc market to record a 72,000-tonne deficit in 2019, adding to the 326,000-tonne deficit in January-November 2018. 

In the physical market, premiums into China and Southeast Asia have softened ahead of the Lunar New Year holiday. Premiums elsewhere are little changed.

Low seasonal demand and weak downstream demand continue to overhang galvanized steel prices. Weaken momentum in the global vehicles market is likely to act as a drag for steel consumption and, in turn, zinc usage

Spot treatment charges for zinc concentrates reached a multi-year high of $210-240 per tonne cif China at the end of January while various new and restarted mine projects continue to boost mine production. The recently started Gamsberg and Century zinc mines will continue to ramp up during 2019. Glencore recently raised its 2019 production guidance; higher output is expected from Goldcorp's Peñasquito mine.


The latest commitment of trader (COT) data showed net length among LME investment funds increased by 6,713 lots in the week to January 25 - the 1,850-lot reduction in open shorts reinforced the solid 4,864-lot build in gross longs.

Conclusion
Zinc has rallied strongly since mid-January, bolstered by signs of continued structural tightness. But although positive sentiment remains intact, prices are starting to look somewhat overbought and would benefit from some consolidation in the short term.

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