Singapore 01/07/2016 - Zinc contracts on the Shanghai Futures Exchange are showing signs of overheating after fund interest lifted the September contract to a fresh 13-month high on Friday.
The most active SHFE zinc contract has gained around 40 percent since mid-November. The September contract closed at 16,530 yuan per tonne on Friday, up 135 yuan from the previous day, with 246,792 lots changing hands by the end of the day.
"There are signs of overheating for zinc. Funds like zinc now as the metal has the best fundamentals among the base metals," a Shanghai-based zinc analyst said. "There is definitely a bubble forming for SHFE zinc. But when the bubble will burst and when these funds will exit, that is uncertain."
Open interest for the SHFE September zinc contract had risen to 219,258 positions at Friday's close from 192,138 positions a day ago.
Minmetals Jingyi Futures on Friday recommended clients square off their SHFE zinc positions, saying "the overheating in zinc in the short-term is obvious".
SHFE zinc is getting a boost from funds going long despite zinc demand easing slightly while Chinese smelters have yet to cut output, the brokerage added.
Chinese refined zinc production climbed 2.1 percent year-on-year to 533,000 tonnes in May, reversing a 2.5-percent decline in April, the latest data from the National Bureau of Statistics showed.
Zinc is largely seen as having the best fundamentals among the base metals due to tightening global ore supply following production cuts by Glencore and several mine closures.
"There is still no solution to the supply tightness for ore. The zinc price rise has the support of fundamentals," another Shanghai-based zinc analyst said.
But while the fundamentals are strong for zinc due to tightening ore supply, there is limited room for any further increase in the SHFE zinc price, an analyst at a Beijing-based futures brokerage said.
"After reaching 16,000 yuan, people are wondering if it will go up to 17,000 yuan or higher. But it is uncertain whether demand can drive the price higher," she said.
There is no obvious improvement in the overall macroeconomic environment, she said, noting that the latest Chinese manufacturing purchasing managers index (PMI) was disappointing.
The Caixin manufacturing PMI for June came in at 48.6 on Friday, below the forecast of 49.1 and May's 49.2. It was the third monthly decline in a row and the steepest deterioration in manufacturing conditions since February.
SHFE zinc could also come under pressure should more Chinese miners restart production due to high prices, the analyst added.
(Editing by Mark Shaw)