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Technical CommentAnalysis
- Zinc prices continue to trend higher in a ‘three steps up/one step down’ pattern. Since prices are approaching higher levels of resistance, we would expect the upward legs to be scaled back, which seems to be the case.
- The recent peak in LME three-month prices at $2,418 per tonne took out the July 2014 peak at $2,416. This was the peak from the false dawn in 2014 when the market first started to get bullish about the closure of Century, Lisheen etc. – the second false dawn was seen last year in the run-up to $2,404.50 per tonne.
- The stochastics are falling, which suggests fresh consolidation, but the overall upward trend looks robust.
- We would let this pullback run its course before looking to buy again. The next upside objectives would now be the highs in 2010 and 2011 that range between $2,540 and $2,736 per tonne.
Macro factors Zinc is trending higher; bouts of profit-taking and producer selling are bound to be seen and at times are likely to dominate – as seems to have been the case in recent days. We said on Tuesday, October 4, that the latest run-up has been quite sharp again so we would be wary of pullbacks. That is especially so with 10,000 tonnes of zinc being delivered into LME-listed warehouses in New Orleans – the first delivery in since September 12 and the first large delivery in since 29,900 tonnes on August 9. Since then, a further 10,550 tonnes have moved into warehouses – although there has been nothing over the past three business days. Last week’s COTR report showed money managers adding 10,404 lots of longs, while shorts added 2,916 lots – this pushed the net long money managers’ position to a new high for the year at 83,722 lots. The previous high was 99,251 lots in May 2015. Fresh buying by longs at these high prices levels suggests sentiment remains strong. We wait to see if today’s COTR data shows profit-taking and/or short selling. C-3s has eased – it was last at $16-14 per tonne contango, having been $11-9 contango at the end of last week and $3.50-1.50 earlier last week. This suggests some profit-taking by longs or a drop in short-covering. Given some concentrated holdings of nearby positions, with one entity holding 50-79 percent of the warrants and ‘tom’ and cash positions equivalent to 50-79 percent of the warrant position, we would not be surprised if the market tightens again before long. The forwards have tightened up in the 3-27 month period but not in the 3-15 month period. The 3-27 months spread is $31.50 per tonne back, having averaged $18 per tonne back in the second half of September. This may indicate increased forward selling.ConclusionZinc’s rally has been robust and there have been only limited pullbacks along the way. The physical market is quiet but much of that may be due to consumers being covered by longer-term contracts. With negotiations for 2017 starting, the tighter fundamentals may well give premiums and sentiment a boost. The price action seems more bullish than overall sentiment but we feel the market may ultimately have to chase prices higher until more restarts are announced. Given the gains already, we would not expect too much more room on the upside. Still, producers may want to see LME zinc stocks fall further before they restart idle capacity so the market could run hot for a while. Producers may well increase hedge selling before announcing production restarts, however – we need to be wary of that. |
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