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Analysis
Macro drivers Nearby spreads remain tight although the backwardation in the LME cash/three-month spread has eased further amid pockets of long-liquidation. It was recently at $85 per tonne compared with a record of $135 per tonne on April 30. Still, there remains the risk of the strong premium for prompt material continuing to attract previously off-market stocks back into the LME warehouse network; a total of 45,475 tonnes of zinc has been delivered on warrant so far during April-May. In addition, only limited fresh cancelations have been occurring; currently, only 3.4% of stocks are booked for removal. But LME stocks are tightly held - one entity accounts for 40-49% of warrant positions. We maintain our view that they are set to become increasingly volatile while availability continues to shrink. Shanghai Futures Exchange zinc stocks totaled 72,090 tonnes on April 30, down from a peak of 124,038 tonnes on March 15 amid signs of improving demand while maintenance-related closures limit smelter utilization rates. In the physical market, zinc premiums remained under pressure in the week to April 30. Rates in Northern Europe were trading at their lowest since August 2009 because of the deep backwardation in LME spreads. First-quarter producer results have proven mixed so far although they continue to signal rising production. Boliden today reported zinc-concentrate output declined 3% year on year in the first quarter due to falling ore grades. Lower year-on-year production has been reported by Bueneventura (-19.4%) and from the large Antamina (-18.5%) and Red Dog mines (-9.3%) - although the fall at the latter is a temporary phenomenon. Vedanta also reported a 15.5% year-on-year drop in zinc production from its Indian operations due to the transition to underground mine operations but this was negated by the start of operations at Gamsberg that will continue to ramp up. Glencore, MMG, South32 and Lundin reported output increass of 11.9%, 21.2%, 10.7% and 9.7% respectively. Zinc production from the Century tailings project is set to step up in the current quarter following the installation of a third water cannon and pumping system. Still, spot treatment charges (TCs) stood at $260-290 per tonne cif Asia-Pacific in April, up from $215-250 per tonne in February, due to limited demand from Chinese smelters. While an estimated 500,000 tonnes per year of upgraded smelter capacity is set to enter production in the current quarter, this will be offset by maintenance closures elsewhere in the short term. The 7% year-on-year decline in Chinese zinc-concentrate imports in the first quarter of this year implies short-term demand remains limited. The International Lead & Zinc Study Group (ILZSG) pegged the refined zinc market in a 63,000-tonne surplus in January-February. The ILZSG forecasts the refined zinc market to record a 72,000-tonne deficit in 2019, adding to the 384,000-tonne deficit in 2018. Net length among LME investment funds declined by 1,420 lots in the week to April 26; the 74-lot decline in open shorts failed to offset the 1,494-lot decline in gross longs. Conclusion Our central view remains little changed. Falling SHFE stocks and stronger economic signals from China, coupled with low utilization rates among Chinese smelters, will continue to create structural tightness over the short-to-medium term. Price gains remain capped while tight spreads continue to attract previously off-market stocks back into the LME; however, the small falling wedge that appears to be forming suggests zinc will regain some upward momentum in due course. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations. |
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