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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.
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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.
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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.