Consumption anticipation, low imports stocks strengthen SHFE...

Consumption anticipation, low imports stocks strengthen SHFE zinc (from Shanghai Metals Market)


SMM Insight 12:10:02PM SHANGHAI, Mar 28 (SMM)

The most traded zinc contract on the Shanghai Futures Exchange hit a new peak so far this year overnight in anticipation of consumption boom in April and with limited inflows of imported materials. SMM historical data showed that domestic social inventories saw substantial de-stocking in April. In the week ended March 22, social inventories of refined zinc across Shanghai, Guangdong and Tianjin declined 10,100 mt to stand at 220,300 mt.

While April’s demand might have been somewhat depleted as buyers stepped up procurement in advance to await lower value-added taxes, the anticipated consumption improvement still fuelled confidence among investors. With limited inflows of imports, stocks of refined zinc in Shanghai-bonded areas stayed below 100,000 mt as of March 22, a relatively low level, SMM data showed.Customs data showed that imports of refined zinc in February tumbled 70.59% month on month and 46.04% year on year.

Zinc stocks across LME-approved warehouses extended declines towards lows since 2000. This prompted LME zinc to outperform its SHFE counterpart and lowered the SHFE/LME price ratio, which currently stands near record lows. Such arbitrage opportunities triggered some buying in Shanghai and bolstered the prices.Domestic supply constraints also cemented investors’ expectations of lower inventories. Due to thinner profits, Chinese smelters cut capacity for maintenance since the first half of 2018. This lowered domestic output. While greater concentrate supplies overseas buoyed treatment changes and recovered profits that smelters could see in the second half of last year, domestic production failed to substantially rebound as two large smelters suffered production disruption. The two smelters have yet to recover to full capacity as of late March. Output of refined zinc in China in the first quarter of 2019 is likely to stand lower than a year earlier even as a medium-sized smelter in Hunan that closed for more than one year is gradually recovering. Some smelters will undertake routine maintenance in April, which will impact production by over 10,000 mt. This further drove investors to add their bullish bets on SHFE zinc.

The government’s infrastructure push that started from late 2018 is likely to take hold and lend some support to zinc consumption. Consumption recovery and limited imports supplies are expected to subdue social inventories of refined zinc across Shanghai, Guangdong and Tianjin to the 100,000 mt level soon.The SHFE June contract, however, saw its short positions soar over 10,000 lots during daytime trading hours on Wednesday. This was due to market expectation that the two large smelters will achieve full capacity in June. With developments in the mix, SHFE zinc is expected to temporarily trade range bound to await consumption improvement.