- Zinc prices continue to consolidate after the rapid gains in the second half of November, when prices spiked up to $2,985 per tonne, basis three months. Having pulled back, strong underlying support has been found along the 20 DMA.
- Prices have run higher but have lacked the energy to overcome the December 7 high at $2,857 per tonne.
- While the underlying bull market remains intact, a lack of upward momentum in recent weeks increases the risk of stale long liquidation.
- A break below the 20 DMA and below $2,655 per tonne could lead to a more meaningful correction. The long-term UTL is around $2,400 per tonne.
Zinc’s fundamentals are bullish – International Lead and Zinc Study Group (ILZSG) data for January-October shows zinc mine output fell 1.9% to 10.887 million tonnes, a drop of some 205,000 tonnes. Refined production fell 0.6% to 11.322 million tonnes, a drop of just 63,000 tonnes, while consumption grew 3.7% to 11.599 million tonnes, an increase of 415,000 tonnes – implying a supply deficit of 277,000 tonnes. In October, the deficit was 17,500 tonnes compared with 20,300 tonnes in September. Still, since the low price of $1,444.50 per tonne in January, three-month zinc prices are up 93.5%.
There is also idle mine capacity that can be reactivated to alleviate the supply deficit.
C-3s is holding in a contango either side $17 per tonne. The weaker spread suggests profit-taking by longs and corresponding lending. Still, with prices holding up, there seems to be enough fresh buying around to absorb the selling.
The main change in the spreads is in the far forwards, which have tightened again: 3-15 month was valued at $57b per tonne on December 14 compared with $18b on December 13 and 3-27 month was valued at $247b compared with $183.2b over the same period. This suggests that yesterday’s rebound attracted more forward selling.
The market does not feel tight. LME stocks are at best merely drifting lower and there are no large holders of nearby positions. The forward banding report show two large shorts each holding 5-9% of the December open interest, which on Tuesday stood at 14,096 lots.
Although zinc’s fundamentals are strong, how much of the strength (and further likely strength) is already in the price, which is up 93% this year and trading at levels not seen since 2008 (i.e. they are above the levels when China poured money into infrastructure projects in the aftermath of the financial crisis)? Perhaps low prices and reduced levels of capital investment by producers mean the supply set-up is much tighter but it is common knowledge there is sizeable capacity sitting idle. Still, there is little doubt that sentiment is bullish in some quarters – funds and specs – but the weak physical market tells a different story.
We remain bullish for the metal’s fundamentals but not so for the price at these levels. To get more bullish, we would want to see a more concerted drawdown in exchange stocks. We think a more meaningful correction is overdue.