Very short term (1M):  Up
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Flat

Resistances:
R1 $2,285 20 DMA
R2 $2,555 October 2019 high 
R3 $2,958 2019 high
R4 $3,595.50 2018 high
R5 $3,780 Jul 2007 high

Support:
S1 $2,201 Dec low 
S2 $2,200 Psychological
S3

$2,190 2019 low

Stochastics:
Rebounding

Legend:

BB– Bollinger band
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
U/DTL – up/downtrend line
H&S – head-and-shoulder pattern
RSI – relative strength index


Analysis
           
  • LME zinc has wiped out most of the gains from the rebound off the December 3 low and looks set to continue lower in the short term.
  • The declining 50 DMA is en route to trade below the 100 DMA so there is no way of ruling out more selling.
  • As well, the 20 DMA is acting as nearby overhead resistance. While it still declining, it should continue to pressure prices lower. 
  • A retest towards the December 3 low again as well as September 3 low at $2,190 per tonne cannot be ruled out.
Macro drivers
An article from the Wall Street Journal states that US President Donald Trump has not made his decision to increase tariffs on $165 billion of Chinese goods. This has fueled speculation that there may be a delay in implementing the tariffs set for December 15 to get the US-China ‘phase one’ deal to the finish line. Global investors were quick to absorb the latest positive trade headlines, with the London Metal Exchange base metals prices bar tin moving higher in early Asian trading on Wednesday December 11.

A steady decline in global inventories remains one constructive feature for LME zinc. Zinc stocks in the LME system have fallen to 57,300 tonnes from 129,325 tonnes at the close of 2018. Based on the current rate of outflow, stocks are on course to close this year near a record low. And in SHFE zinc stocks, inflow has been lacking in the second half of 2019 despite higher refined output among Chinese smelters. Inventories stood at 37,118 tonnes as of December 6, up by 17,015 tonnes from the end of 2018. The SHFE increase is dwarfed by the LME decrease; combined inventories have in fact declined by 36% so far in 2019.

But speculative funds positioning is bearish towards zinc, exacerbating the downward pressure on the price. In the week to December 6, stale-long liquidation continued, with 3,033 lots removed while shorts added 732 lots to their bearish exposure. Zinc's net long fund position (NLFP) has fallen 7,453 lots from a peak of 18,345 lots on November 8. With no buying support from LME fund managers, we envisage continued price weakness. 

Adding to the current bearish pressure is the lack of support from the fundamentals. According to recent International Lead & Zinc Study Group (ILZSG) data, global usage outpaced supply by 156,000 tonnes over the first nine months of 2019 - considerably smaller than the 272,000-tonne deficit recorded in January-September 2018. Although zinc's fundamental backdrop appears somewhat tight in 2019, the contraction in the deficit is likely to apply bearish pressure on the price.

Conclusion
While it appears that LME zinc is trying to form a base above the psychological level of $2,200 per tonne, the risk of further downside remains. With the 2019 low within reach and sellers still in control, it will take an extremely positive US-China trade deal to contain the current downward pressure, we feel.


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