ZINC TODAY: Is this the end of the price correction?

Short Term:
Medium Term:
Long Term:
R1 2,800 20 DMA
R2 2,981 2017 high (Feb)
R3 2,985 2016 high (Nov)
R4 3,227 61.8% Fibo of 2006-2008 downtrend
200 2,450
20 2,800
50 2,780
S1 2,650 Key level
S2 2,450 200 DMA
S3 1,445 2016 low

Technical Comment

Momentum is negative and ADX is below 20, suggesting a weak downtrend in motion.


Note: we are using 5*charts today because our ChartStation is experiencing some technical issues.

  • Zinc has rebounded noticeably over the past few days. Still, it remains below its 20 DMA and its 50 DMA, which is probably a sign of negative sentiment. In this context, we may retain 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 should zinc close below the 50% Fibo of the 2006-2008 downtrend by the end of March, the bull market may be delayed.

  • On the upside, zinc needs to move back above its 20 DMA to turn sentiment positive. If so, its key challenge is to take out the 2016 high to make sure the uptrend will last longer. On the downside, we will pay close attention to its key support, 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.

Macro drivers

LME zinc has started the week on a positive note, rising about 1.1%. The base metals are broadly rising thanks to a weaker dollar and stronger global risk appetite despite the likelihood the Fed will raise rates on March 15.

With open interest rising today, we think traders are rebuilding some tactical long positions after zinc turned oversold last week due to a significant sell-off across the metals. Still, given the elevated macro/political risks this week (e.g. the FOMC decision and Dutch elections on Wednesday), the risk of renewed long liquidation is elevated.

Net spec positioning in LME zinc deteriorated for a third week in a row over February 24-March 3, according to the latest LME COTR. This was mainly driven by a build-up of shorts and was reinforced by long liquidation. The fact that shorts are re-engaging more fully is a sign that sentiment is turning negative. We will pay close attention to tomorrow’s data (capturing the March 3-10 period) to see what was behind last week’s 3% sell-off in zinc prices.

In the spreads, cash/three-months has loosened steadily since February 20 when it reached a small backwardation of $2.50 per tonne. It is now in a contango of $17.50; perhaps the market has eased in recent days/weeks.

In the physical market, premiums continued to strengthen last week in the USA due to the strike at Noranda Income Fund’s zinc processing facility in Canada, which is tightening available supply. In Asia, premiums were stable amid little buying interest but may weaken in the near term if availability eases in the USA, as evidenced by the pick-up in cancelled warrants in New Orleans. In Europe, premiums were steady amid ample availability.

Flows in visible inventories (LME & SHFE):

Visible stocks, which remain elevated by historical norms, have barely moved so far this year (down on the LME but up on the SHFE). This suggests that the global supply/demand balance has not tightened recently.

  • LME zinc stocks – at 383,250 tonnes as of March 10 – are little changed (-850 tonnes) so far in March (including a fall of 3,200 tonnes last week) after falling 11,975 tonnes or 3% in February. In the year to date, stocks are down 44,600 tonnes or 10% after dropping roughly 35,000 tonnes or 8% in 2016.
  • SHFE zinc stocks – at 194,788 tonnes as of March 10 –are down by 3,107 tonnes so far in March (including a fall of 4,245 tonnes last week) after climbing by 35,690 tonnes or 22% in February. In the year to date, stocks are up 41,694 tonnes or 28% after falling 47,604 tonnes or 10% in 2016.

Supply/demand balance:

The ILZSG estimates that the refined zinc market was in a deficit of 286,000 tonnes in the whole of 2016 compared with a surplus of 189,000 tonnes in 2015.

While refined zinc production was little changed (+0.1%) in 2016, refined demand rose 3.6%, thanks primarily to China (accounting for 48% of total demand). Demand there rose 8.6%; as well, in India (accounting for 5% of world demand), demand surged by 14%.


We may retain our constructive view on zinc in the very short term but might turn neutral if $2,650 per tonne gives way on a daily closing basis and turn negative on a break below the 200 DMA. For now, we continue to treat the recent consolidation as merely technical retracement where worried longs exited their positions while shorts try to build some tactical positions. 

As a reminder, we have been bullish since January 9.

We are neutral towards zinc over the short term (1-3 months) because we think that prices already reflect the forward tightness in the fundamentals.

We are constructive over the medium and long terms because we believe that the rebalancing process will continue, with the tightness in the concentrate market set to show up in the refined market. 

For more information, see our December zinc spotlight.

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