FOCUS - Zinc prices overdone, consolidation likely

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Ewa Mantheyewa.manthey@fastmarkets.comCorrespondent+44 (0) 20 7337 2146

London 10/06/2016 - Zinc's recent rally - it hit a fresh one-year high above $2,100 per tonne this week - is overdone and correction lower might be looming, market participants said.

Although zinc's fundamentals remain bullish, its sudden move higher this week was not justifiable and was driven by fund buying, rather than actual demand, traders said.

"The zinc price move is in no way a result of consumer buying. It is the fund guys putting their money in and producer shorts are buying back. It then gets pushed through in a thin market and then they look around and see that there is no support and no one is there so it comes back down again," one trader said.

Zinc continues to trade around its highest in 12 months - it was last at $2,071, up $1.50 on the previous close. The $2,100 level was challenged in the previous session, but prices might not find the steam to go up there again, broker Triland noted.

"From all the metals, zinc is probably the only one that is fundamentally justified to push higher but, the price rise this week was overdone," a second trader said.

Since May 24 the metal has risen 16.4 percent - it is the only metal setting fresh year highs while other metals in the complex are lagging behind - that may prompt some profit-taking, market participants said.

"Everyone knows the concentrate story with zinc - so funds are buying. The technical funds then get involved and push it through key levels and then 'hey-presto' all of a sudden things look more positive. Funds are hoping to pick it up at these levels and then potentially profit later on down the line," a third trader said.

Spot treatment charges continue to indicate tightness in the zinc concentrate market - they remain at a low $120-130 per tonne after falling sharply in January and February.

Meanwhile, the outflow from the LME warehouses continues - stocks have dropped below 400,000 tonnes at the start of May and have continued to fall. They now stand at 380,400 tonnes, supporting the view that the market is in deficit. The CME and SHFE stocks have also been declining.

The ILZSG forecasts the global refined market to post a deficit of 352,000 tonnes in 2016 - demand is set to increase 3.5 percent to 14.33 million tonnes while global refined zinc production is seen rising 0.5 percent to 13.98 million tonnes.

As well, production from Glencore, Vedanta and MMG alone is expected to drop by 685,500 tonnes in 2016 based on current guidance.

Still, zinc prices are approaching $2,200 - the level at which Glencore could restart production.

"We imagine there are large selling orders here - traders could be inclined to close out their positions and take profits if they feel that supply should become less tight if prices trade sustainably above $2,200," FastMarkets Boris Mikanikrezai said.

In the spreads, the cash-threes is still in a small contango of $6.75-4.75. But the spread could tighten, FastMarkets head of research, William Adams noted, because one entity holds 40-49 percent of the warrants and two entities each hold 'tom' and cash positions equivalent of 30-39 percent of the warrant position.

Meanwhile, the 3-27 months spread is currently trading around $50 backwardation.

"The last time LME zinc inventory was this low however, the 3-27 spread was trading at over $300 back," Leon Westgate, ICBC Standard Bank analyst, noted. "Headline three-month zinc prices were interestingly also around $2,000 per tonne."

If exchange stocks continue to be drawn down at the current rate - around 2,000 tonnes a day - then by late July 3-27 month spread should be closer to $200 back, Westgate added.

"Zinc still remains the standout speculative long on supply deficit projections yet technically it is looking heavily overbought," a fourth trader noted. "Any threat of weakness is likely to send bulls looking to crystallise gains."

(Editing by Tom Jennemann)



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