supply concerns pushing zinc

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Supply concerns pushing Zinc's outperformance
Prices of the metal jumped over 2%, outpacing gains by other metals as speculative buyers jumped into the market

Author: Manolo Serapio Jr. (Reuters)
Posted: Friday , 20 Nov 2009

MANILA (Reuters) -

Shanghai zinc futures hit their highest level in 18 months on Friday and LME prices jumped more than 2%, outpacing gains in other base metals, on speculative buying fuelled by supply concerns.

Australia's Century zinc mine, which produces a third of the country's zinc output, was due to run out of concentrate at its shipping port earlier this week, prompting buyers to look for alternative sources.

A potential squeeze in zinc concentrate supply and higher power costs in China may force some smelters to cut production, a trader in Singapore said.

China will raise power prices for non-residential users by around 5.4% from Friday, its first increase since July 2008, to compensate grid firms that lost out from a state cap on prices.

Analysts estimated the power tariff increase to lift production cost for zinc smelters by 100 yuan per tonne, for aluminium by about 400 yuan, and for copper by around 20 yuan.

But zinc prices far outpaced gains in aluminium and copper on Friday, lending more credence to talk that traders were merely driving prices higher.

"Some speculative buyers who were in the market last Friday and earlier this week have returned to push prices higher on expectations prices would rise further," said a dealer in Shanghai.

Third month Shanghai zinc rallied 250 yuan to touch a high of 18,120 yuan a tonne, before easing to 17,990 yuan by 0332 GMT, up 120 yuan.

Three-month zinc on the London Metal Exchange rose $45 to $2,260 a tonne, after having risen as high as $2,274 earlier.

Zinc prices have risen 78% in Shanghai and 87% in London so far this year, smaller than copper's gains of more than 120%.

LME copper rose $50 to $6,840 a tonne and Shanghai copper added 130 yuan to 53,670 yuan per tonne, not far off 14-month peaks hit earlier in the week.

Copper is up around 5% this week, its biggest gain in four weeks.

Heavy snow in China over the past week is also supporting base metals prices, defying a firmer dollar.

"Everybody in China is trying to double their stocks, be it fuel or metals, and the scrap supply for most base metals still has not come up to the normal level because industrial production is still lagging," said the Singapore-based trader.

But some analysts believe prices have run farther than fundamentals can justify, pointing to rising metals inventories and patchy global economic data.

"Should the macro numbers out over the next several weeks continue to come in on the weaker side, markets will have to focus on the possibility of a double-dip recession, in which case many of the high flying commodity complexes could correct rather sharply and finally decouple from the weaker dollar," MF Global analyst Edward Meir said in a note.

LME copper stocks rose 6,450 tonnes to 420,550 tonnes on Thursday, the highest since April 24. In Shanghai, copper inventories stand at 104,939 tonnes, the biggest in five and a half years.

LME zinc stocks are at four-year highs, nickel inventories are at 15-year highs and aluminium stocks are at near record levels.

Shanghai copper stocks are likely to drop by between 1,000 and 2,000 tonnes when the figures are released later on Friday, traders said.

"I think some material may have been transferred to LME warehouses in Korea or Singapore, given that Shanghai prices are lower than on LME," said another Shanghai dealer.

© Thomson Reuters 2009