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Analysis
LME zinc stocks continue to fall, reaching 58,425 tonnes - a fresh 2019 low. Even though the rate of outflow has slowed, there is still no sign of metal coming back to LME-approved warehouses. The backwardation in its cash/three-month spread has eased somewhat to $40.50 per tonne but this is not wide enough to incentivise metal holders to release more metal. Instead, most of the metal seems to have arrived in SHFE-approved sheds where inventories rose to 124,038 tonnes as of March 15. But the lack of outflow is starting to look rather bearish, indicating that most of the metals is sitting idle due to growing signs that domestic demand is not as robust as most market participants had believed. We do not think that recent the increase in SHFE stocks was due to significant improvement in the operating rate at Chinese zinc smelters despite rising availability of zinc ores and concentrates as well as more favorable treatment charges (TCs). Even though LME stocks suggest dwindling supply, higher inflow into the SHFE means that combined LME/SHFE stocks are up 22% so far in 2019. The data does not point to global tightness in the refined zinc market, which may have discouraged buyers from getting too aggressive just yet. Still, LME zinc’s bet lonf fund position (NLFP) remains fairly elevated at 23,563 lots as of March 8 despite fresh selling of 921 lots. We attribute the recent selling to profit taking while overall sentiment among LME fund managers remains fairly bullish. Still, recent technical developments could put its elevated NLFP under pressure and trigger liquidation from gross longs as well as fresh selling. Fresh rumors that Nyrstar is considering options such as bankruptcy are fueling concerns about in an already tight zinc market. According to the latest report from the International Lead and Zinc Study Group (ILZSG), the refined zinc market ran a deficit of 28,000 tonnes in January 2019. This is in contrast to the 5,000-tonne surplus of previous years and suggests that, while metal usage has increased year on year, refined production has not. This is in line with our previous assessment that there is a lag in rising refined output despite rising global mine output. As long as this trend continues, the shortfall could grow and the refined zinc market could tighten to a point where the price must rise to tempt smelters back into production. Although treatment charges (TCs) have risen in line with rising supply from several key zinc mines, there is still an air of hesitation among zinc smelters about raising production while the LME zinc price is considerably lower than its 2018 high. Conclusion We saw some follow-through selling this morning but buyers can lean on the 20 DMA for technical support. The battle between buyers and sellers could intensify in the absence of a clear directional bias in the LME zinc price action - can it continue higher here or will it break below the UTL off the January low? |
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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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