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ZINC TODAY: Too early to turn bearish, we feel
8th March, 2017 10:46 AM by Boris Mikanikrezai
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Column 3 |
Column 4 |
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 Medium Term: |
 Long Term: |
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Resistances:R1 |
2,827 20 DMAR2 |
2,981 2017 high (Feb)R3 |
2,985 2016 high (Nov)R4 |
3,227 61.8% Fibo of 2006-2008 downtrend |
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Support:100 |
2,67250 |
2,77020 |
2,827150 |
2,547 |
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Support:S1 |
2,650 Key levelS2 |
2,494 150 DMAS3 |
1,445 2016 low |
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Legend:DMA – daily moving average
Fibo – Fibonacci retracement level
RSI – relative strength index; it helps us to detect whether a metal is oversold (RSI below 30) or overbought (RSI above 70)
Momentum index – allows us to determine whether momentum is positive (>0) or negative (<0). We use a parameter equal to 10, corresponding to momentum over the past 10 days.
ADX – average directional index; this allows us to gauge the strength of the current trend (above 20, the trend is strong; below 20, the trend is weak)
The combination of momentum and ADX allows us to determine the current trend (up or down) and its strength (strong or weak).
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| Technical CommentMomentum is negative and ADX is below 20, suggesting a weak downtrend in motion.Analysis
- Zinc has come under growing downward pressure in recent days, breaking firmly below its 20 DMA and 50 DMA, which is probably a sign of weakening sentiment. But we are willing to 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 driversLME zinc has sold off by roughly 3% so far this week, making it the second-worst performer behind nickel, which has fallen around 4%. The sell-off across the base metals seems to reflect a pullback in overall risk appetite due to growing investor concerns over an imminent Fed rate increase. Most risk asset classes including equities are selling off sharply.The sell-off in zinc has been driven by increasing trading volumes, which suggests a strong conviction among market participants to exit the zinc long trade.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 further reinforced by long liquidation. The fact that shorts are re-engaging more fully is a sign that sentiment is reversing negatively.In the spreads, cash/threes has loosened steadily since February 20 when it reached a small backwardation of $2.50 per tonne. It is now in a contango of $9.75; perhaps the market has become less tight in recent days/weeks, which is consistent with price weakness.On the macro front, China’s trade data surprised to the upside in February, with imports in yuan terms up 45% from a year ago, which suggests that domestic demand is picking up. Meanwhile, during its National People’s Congress (NPC) which started on March 5, China cut its economic growth target to “around 6.5%” for 2017 from “6.5%-7%” last year, in line with expectations.In the physical market, premiums continued to strengthen this 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 in case of more availability coming from the USA, as evidenced by the pick-up in cancelled warrants in New Orleans. In Europe, premiums were steady given 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 383,850 tonnes as of March 8 – are little changed (-250 tonnes) so far in March after falling 11,975 tonnes or 3% in February. In the year to date, stocks are down 44,000 tonnes or 10% after dropping roughly 35,000 tonnes or 8% in 2016.
- SHFE zinc stocks – at 199,033 tonnes as of March 3 –are up by 1,138 tonnes so far in March after climbing by 35,690 tonnes or 22% in February. In the year to date, stocks are up 46,209 tonnes or 30% 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% and, to a lesser extent, in India (accounting for 5% of world demand), where demand surged by 14%.ConclusionWe may retain our constructive view on zinc in the very short term but may turn neutral in case of a break below $2,650 per tonne and turn negative in case of a break below the 200 DMA. For now, we continue to treat the current price weakness as merely technical retracement where worried longs exited their positions while shorts try to build some tactical positions. We think the shorts will be proven wrong but we are willing to accept that a break below our key support and, more importantly, the 200 DMA could attract intense momentum-based selling, which is why we may follow the trend and approach prices from the short side over a one-month horizon.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[/table][/table]
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