London 06/05/2016 - Zinc has been singled out as the potential outperformer in 2016, with metals analysts highlighting the long-awaited deficit as main driver of bullish sentiment.
But while the metal has put in an impressive performance since February, rising 30 percent from its lows and seemingly on track to get above $2,000 late last month, the rally has stalled - the metal was last around $1,842 per tonne and the cheapest since April 14.
Zinc bolted too soon, market participants said. Demand has not notably improved, availability is ample and much of the recent price increase was driven by speculative activity.
"The CTAs have woken up to zinc and at one point the price rally didn't want to slow down on talk of lack of supply. But I can't help think we have been here before and people are jumping ahead of the near-term narrative," a trader said.
Indeed, analysts have banged the zinc bull drum for years. In October, most attendees at a Macquarie conference favoured going on zinc, predicting prices of $2,000.
But the reality was that the metal lost 31.2 percent of its value it 2015, surpassed only by nickel. And in January this year it fell to its cheapest since 2009 at $1,444.
"Everyone is talking about a deficit but we have been here before and the metal ended up being one of the worst performers last year," a second trader said.
Mixed data only serves to muddy the water. According to the WBMS, the zinc market recorded a surplus of 110,000 tonnes in the first two months of 2016 compared with a surplus of 121,000 tonnes for the whole of 2015.
The ILZSG reported that the metal was oversupplied by 65,800 tonnes in this period.
"[This is] Rather a sizeable up-tick after a largely unchanged reading in January and moving in quite the opposite direction of the overall 350,000-tonne deficit target," INTL FCStone analyst Edward Meir said.
Still, in a bullish move, the ILZSG revised its forecasts for 2016 - it now expects the global refined zinc market to record a deficit of 352,000 tonnes in 2016 compared with 152,000 tonnes in its October 2015 forecast.
Meanwhile, Citi Bank analysts also believe the market will swing to a deficit because supply will miss demand by around 120,000 tonnes this year. This is due to production cuts, most notably the 500,000 tonnes from Glencore but also from Vedanta and Nyrstar.
While CTA interest may be strong, physical demand has been soft despite the second quarter traditionally being a period restocking.
"With the demand profile weak, the initial strong rally - driven by short-covering - is likely to become more laboured," Sucden said.
"We are still holding our long-term bearish trendline. We are short and happy about that," Gianclaudio Torlizzi at T Commodity said. "We may suffer but we are confident that we will see a surprise in the second half… without the physical market there is nothing to back it up."
As well, there are mixed opinions about availability of metal. LME stocks have fallen below 400,000 tonnes for the first time since 2009 but cancelled warrants have also declined, putting on-warrant availability at 365,400 tonnes.
And while SHFE zinc stocks have fallen 5,721 tonnes to 254,278 tonnes, there is plenty of material held off-exchange, particularly in New Orleans, market participants said. This only increases the uncertainty - the metal could quickly be moved into registered sheds and wipe out any potential price increase.
"Availability remains high - this makes the previous rally unjustifiable," an industry consultant said.
"With interest rates low and a contango market, warehouse deals could see more material end-up in LME sheds," a warrant trader added.
The zinc concentrate picture is also hazy. A transition to underground from open-pit mining at HZL's Rampura Agucha mine in Rajasthan has interrupted the retrieval of zinc concentrates.
The company - one the world's largest producers of refined zinc and lead - tendered for 110,000 tonnes of zinc concentrate for delivery in June. Still, HZL has resolved the issue and is no shortage of availability.
"There is a lot of zinc flooding Asia at the moment. The HZL problems are over and the area is now awash with metal," the warrant trader said.
But the metal cannot be warranted because it does not have the necessary documents, which "could see premiums come down in the short term", he suggested.
Zinc was last at a premium of $95-110 per tonne in Shanghai bonded warehouse and CIF, while for Europe this was last heard at $130-145.
And while there is currently no tightness in the Chinese market for refined metal, at least five major Chinese smelters have carried out or plan maintenance in April-May, according to speculation. If so, output in that period may fall 30,000- 40,000 tonnes.
This could help the bulls sell their side of the story. Low overseas treatment charges (TC) for zinc concentrate have persuaded Chinese smelters not to take delivery of overseas concentrates, preferring instead to supplement supply via the domestic market
Spot TC for zinc concentrate were assessed by FastMarkets at $125-135 per tonne CIF China last month, unchanged for the third consecutive month.
In any case, any price increase could result in more production coming on-stream.
"If zinc goes up, we will start ramping up again," Glencore CEO Ivan Glasenberg said in March.
Wood Mackenzie assumed that Glencore would bring back its shuttered operations in January 2017, when it projected a rise in prices to $2,400.
So while the future may be bright for zinc, perhaps it will not come as soon as the recent price moves suggest.
(Editing by Mark Shaw)