||2,981 2017 high (Feb)
||2,985 2016 high (Nov)
||3,227 61.8% Fibo of 2006-2008 downtrend
||2,791 20 DMA
||2,650 Key level
||2,450 200 DMA
||1,445 2016 low
- Zinc has come under renewed downward pressure in the past two days from strong resistance around $2,900 per tonne. But zinc’s key DMAs remain upwardly sloping, which could exert some upward pressure on prices. So we may keep our constructive stance over the very short term as long as key support at $2,650 per tonne is not breached on a daily closing basis.
Looking at our monthly chart, we continue to see a bullish breakout pattern. But because zinc closed below its 50% Fibo of the 2006-2008 downtrend in March, we think the bull market will be delayed.
On the upside, zinc needs to move back above its 20 DMA to turn sentiment positive. If so, the next resistance is at the 2016 high and the 2017 high. On the downside, we will pay close attention to the key support level, a break of which may trigger further selling pressure towards the long-term 150 DMA, which is likely to determine the sustainability of the uptrend.
LME zinc has dropped 2.3% since the start of the week due to the gradual re-emergence of risk aversion, which is reflected in the downward pressure on major risk asset classes (such as equities), the rally in safe-havens such as gold and Treasuries and the fall in the dollar, highlighting the unwinding of global reflation trades despite fresh positive macro data from advanced and emerging economies.
Supply-side developments may also be at play, with Votorantim saying last week Cajamarquilla in Peru would resume operations at 50% of capacity after a period of suspension due to floods.
Worryingly, the sell-off in LME zinc prices since Monday has been in hefty trading volumes, reflecting strong conviction among market participants about cutting their net long positioning. But open interest data tells us that the price weakness has come from longs exiting their positions rather than shorts coming to the market. The bout of long liquidation is visible in the loosening of nearby spreads, with cash/three-months widening to $27 per tonne contango from an average of $18.85c last week. This suggests that sentiment has not turned meaningfully bearish for now.
But from a fundamental viewpoint, the concentrate market has shown fresh signs of tightness, namely the agreement of treatment charges for 2017 at $172 per tonne, down 15% from last year. This should eventually spil lover into the refined market. Interestingly, the drawdown from global visible stocks has resumed since March, which could reflect some tightness in the refined market.
But refined zinc supply remains resilient, especially in China where refined production rose by 4.4% year-on-year in the first two months of 2017. But Chinese smelters may prove less resilient in the coming months after they announced that 540,000 tpy of capacity would be put on maintenance for unspecified period.
The LME spec positioning in zinc looks fairly elevated considering that the net spec length – at 78,473 lots as of March 24 – is at 79% of the all-time record (99,251 lots) from 2015. So this bout of long liquidation should not surprise investors.
In the physical market, premiums were little changed last week despite the cancellation of 20,300 tonnes of LME zinc from New Orleans, pushing available stocks to their lowest since 2008. This is principally because the recent drop in spot prices was not enough to attract opportunistic buying; most market participants see current prices as far too elevated.
Flows in visible inventories (LME & SHFE):
Visible stocks, which remain elevated by historical norms, have resumed their decline since March so the global supply/demand balance may tighten again.
- LME zinc stocks – at 370,475 tonnes as of April 3 – dropped 13,150 tonnes or 3% in March (including a fall of 3,775 tonnes last week) after falling 11,975 tonnes in February. In the year to date, stocks are down 57,375 tonnes or 13% after dropping roughly 35,000 tonnes or 8% in 2016.
- SHFE zinc stocks – at 183,086 tonnes as of March 31 – dropped 14,809 tonnes or 7% in March (including a fall of 1,290 tonnes last week) after climbing 35,690 tonnes in February. In the year to date, stocks are up 30,262 tonnes or 20% after falling by 47,604 tonnes or 10% in 2016.
The ILZSG estimates that the market was in a deficit of 27,400 tonnes in January 2017 compared with a surplus of 6,000 tonnes in January 2016. The zinc market was in a deficit of 268,000 tonnes in 2016 compared with a surplus of 189,000 tonnes in 2015. The tighter fundamentals were driven by the demand side rather than the supply side, essentially owing to a notable surge in US apparent demand.
We retain our constructive view on zinc (we have been bullish since January 9) in the very short term despite the current downward pressure on prices because we feel the consolidation from the 2017 high has ended and the refined market will increasingly tighten. But the resurgence of risk aversion may pour cold water on investor sentiment, which is why we might turn neutral on a firm break below our key support at $2,650 per tonne because this would invalidate our bullish thesis.
We are constructive over the short, medium and long terms because we expect the fundamentals to tighten further over the course of 2017.
On the supply side, we think the tightness in the concentrate market will eventually show up in the refined market, although we cannot rule out some short-term resilience from smelters. On the demand side, we think conditions for zinc will improve further this year due to robust economic growth dynamics.
For more information, see our March zinc spotlight.