Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Oct 2015.
Below is the Zinc report, to read the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Zinc Stock overhang changes sentiment
Zinc prices have been trending lower at a fast pace since May, with few respites en route. Although the supply situation is set to tighten later this year and remain tight for the next few years, the market seems to have had doubts as to whether the tightness will materialise now that the global demand outlook has deteriorated – the slowdown in China is gathering steam. More recently, some large stock deliveries into LME-bonded warehouses have reminded the market that there are a lot of stocks being held off market in financing deals that may well help fill any supply deficit, at least in the early stages of any shortfall.
Overall trend – Zinc prices have traded in a wide sideways range since the post-financial crisis rebound ended in 2009; the latest run towards the high ground came between March and May in anticipation of supply tightness later this year. But the buying ran ahead of the fundamentals, especially with the demand side deteriorating, predominantly in China. The correction has been severe; one might be excused for feeling the market is no longer concerned about the loss of production from the likes of MMG’s Century mine and Vedanta’s Lisheen but we think this would be wrong. For now, we feel the price has been driven lower on long liquidation and by short selling against a backdrop of a deteriorating Chinese economy but there is a danger that prices are overshooting on the downside. With Century now using stockpiled ores from Century and Dugald River, operations will soon stop, which should send the supply/demand balance into a deficit, making the market reliant on stock drawdowns.
Supply surplus still dominates – The zinc market was in a supply surplus of 150,000 tonnes in the first seven months of the year, down from 180,000 tonnes in the four months of the year, according to the International Lead and Zinc Study Group (ILZSG). There was some sign of the deficit showing up in the deficits in May (23,000 tonnes) and June (15,400 tonnes) but it swung back to a 14,900-tonne surplus in July. In China, the market was in a 439,000-tonne deficit in January-July last year; this year the deficit was just 58,000 tonnes. In the world ex-China, the surplus in the first seven months of 2014 was 180,000 tonnes; it was 209,000 tonnes this year. The smaller shortfall in China has reduced demand for imports, which will have weighed on LME zinc prices – in the first seven months of 2015, China imported 232,000 tonnes of zinc compared with 420,000 tonnes in the same year-ago period. It also exported 81,000 tonnes, up from 15,000 tonnes, but concentrate imports jumped 56 percent to 864,000 tonnes from 554,000 tonnes. China may be building up inventory ahead of likely shortages that mine closures will bring about.
LME stocks leap higher – LME inventories ended 2014 at 690,825 tonnes. They dropped to a low of 426,875 tonnes early in August but have since raced higher to 613,700 tonnes. When stocks were falling at a fast pace, it looked as though they would be around 200,000 tonnes early in the fourth quarter but that has not been the case. The rebound in stocks has included six large increases of more than 20,000 tonnes, the bulk of which have gone into New Orleans. In addition to stock inflow, cancelled warrants have been active in that 79,500 tonnes of warrants were cancelled on August 26. Although this suggested that stock withdrawals were about to pick up again, 74,125 tonnes of cancelled warrants have since been put back on warrant. Available LME stocks (total stocks minus cancelled warrants) have climbed to 553,075 tonnes from a low of 349,300 tonnes early in August, which has significantly increased apparent availability. This has pushed the cash-to-threes spread out to $20 contango from around $5 contango when stocks were below the 500,000-tonne level. The recent stock inflow highlights there are significant off-market stocks around that may well cushion any supply deficit.
Consumption – While the supply side of the equation looks set to become more bullish, the demand side looks weaker, mainly because of the economic slowdown in China but also because capital outflow from emerging markets is likely to slow down infrastructure spending in affected countries. As well, lower oil prices will have hit demand for galvanised steel as shale gas and oil new projects are put on hold. In Asia, zinc demand growth had slipped to 2.8 percent in the first seven months of the year from growth of 6.2 percent in 2014 and 7.1 percent in 2013. With China’s currency depreciations and the contagion from this in August, the second half of the year might be even slower than the first. We expect a $1,650-$1,840 price range in the fourth quarter.
The c-3s tightness is disappearing while stocks climb but the far forward spreads are rising, indicating that there is good forward buying interest at these lower price levels. This bodes well for prices down the road.
The downward momentum in inventories has halted, with stocks up sharply recently. A relatively low level of cancelled warrants suggests there is a good stock cushion to help alleviate any supply shortage in the quarters ahead.
The money managers’ gross long position has shrunk considerably. The gross short position is climbing again and is already quite high – in other words, there is still a risk of short-covering.
Physical premiums for metal in warehouse reflect regional availability and demand. The downward trend in premiums shows there is good availability and weak demand.