ZINC TODAY - Momentum-based buyers are coming back

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Boris Mikanikrezaiboris.mikanikrezai@fastmarkets.comMetals Analyst+44 (0) 20 7337 2151
Short term:Up
Medium term:Flat
Long term:Flat
Resistances:
R12,809 50% Fibo of 2006-2008 downtrend
R22,985 2016 high (November)
R33,227 61.8% Fibo of 2006-2008 downtrend
Averages:
1502,369
202,655
502,633
1002,470
Support:
S12,655 20 DMA
S22,369 150 DMA
S31,445 2016 low
Image

Technical Comment

Momentum is positive and ADX is below 20, pointing to a weak uptrend.

Analysis

  • Zinc has rebounded after finding some support above its 100 DMA. It is now above its 20 DMA, reflecting improved sentiment. So we have decided to turn positive over the very short term (around one month), believing that prices could retest the highs reached late in November 2016.

  • Looking at our monthly chart, we continue to see a bullish breakout pattern. But zinc has failed to move firmly above the 50% Fibo of the 2006-2008 downtrend, suggesting the market is not yet ready to enter a new bull phase.

  • On the upside, zinc's next challenges will be to take out the 50% and 61.8% Fibos of the 2006-2008 downtrend. On the downside, a renewed break below the 20 DMA may trigger additional selling pressure toward the long-term 150 DMA, a break of which could herald the end of the uptrend.

Macro drivers

LME zinc is stronger so far this week after rebounding last week, in part reflecting a pick-up in investor sentiment triggered by healthy global indicators in the US (e.g. a tighter US labor market) and China (inflation in December). The contango in the c/3s spread at $19.25 per tonne is little changed from $17.75 at the start of the year.

In addition, upward pressure in prices was reinforced by announcements of small outout cuts at the start of the year by several Chinese zinc smelters, including Zhuzhou and Chihong Zinc.

Still, investors remain cautious and therefore unwilling to lift their positions singnificantly ahead of the Chinese New Year, especially given that they are relatively overstretched already. The latest LME COT report confirms this thesis.

In the physical market, premiums were stable to higher this week. In Asia, physical rates improved as a result of cuts to domestic smelter supply although trading activity remained muted. In Europe, trading activity remained slow while elevated current price levels refrained buyers to book. In the US, rates were also stable, with most market participants judging that supply is presently ample.

Although the tightness in the global concentrate market in 2016 did not show up in the refined market, especially in China where domestic refined production remained resilient despite the steep fall in TCs, 2017 could be different – Chinese smelters may be forced to reduce their output this year if they are squeezed by concentrate supply tightness and deteriorating demand.

Flows in visible inventories (LME & SHFE):

Although visible stocks have moved lower since November, the pace of net outflows has not been significant. Because they remain very elevated, stocks may continue to act as a cushion against a tighter refined market.

  • LME stocks – at 425,150 tonnes as of January 10 – have edged 2,700 tonnes or 1% lower since the start of January after falling 14,150 tonnes or 3% in December. Stocks dropped roughly 35,000 tonnes or 8% in 2016.
  • SHFE stocks – at 157,440 tonnes as of January 6 – are up 4,616 tonnes or 3% so far this year after edging up 871 tonnes or 1% in December and falling 11,714 tonnes or 7% in November. Stocks fell 47,604 tonnes or 10% in 2016.

Supply/demand balance:

The refined zinc market was in deficit of 17,500 tonnes in October, the ILZSG estimates, bringing the January-October deficit to 277,000 tonnes from a surplus of 201,000 tonnes a year previously. 

Conclusion

We are now constructive toward zinc over the very short term (around one month), holding the view that the break above the 20 DMA should prompt momentum-based buyers to come back in on the long side, especially in this favourable macro environment.

We are constructive on zinc over the short term (1-3 months) because we think that:

  1. The macroeconomic outlook will remain supportive of base metals (i.e. stronger global growth dynamics from stronger fiscal stimulus, both in the US and China). 
  2. The refined market will become increasingly tighter due to the growing tightness in the ore market.

We are neutral over the medium and long terms. As we wrote in our latest Spotlight, despite the zinc market’s healthy fundamentals, we think the forward tightness has been largely priced in. Additional price increases may generate a supply response, curbing the rebalancing process and triggering profit-taking.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.


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