- Zinc's sideways-to-lower move briefly ended late in December, with prices attempting a run higher - they reached $1,636. But it was not strong enough to take out the HRL at $1,639. The HRL and the DTL ended up turning prices lower - they have gone from one extreme to another, with prices dropping back to breach the mid-December low at $1,474. They set a low at $1,444.50. More recently, they have been consolidating again and getting some lift while they do so.
- The stochastics have been rising during this consolidation, which suggests some buying interest. Prices are now approaching the 20 DMA and the DTL again so the upside may well be limited.
- We wait to see if the dominant downward trend pushed prices to fresh lows.
- There is very long-term support from a SL that dates back to 2003 and connects the 2008 low, which is now around $1,390. Given the dominant downward trend, that seems a possible target.
Macro factors
Prices are getting some lift, having recently set fresh lows, but the pick-up is taking prices back towards the dominant DTL. Sentiment remains depressed; poor Chinese data will do nothing to help that. For zinc, the focus is likely to remain on how strong infrastructure spending is in emerging market economies; there does not seem to be much optimism in that area.
Prices and sentiment seem out of sync with the fundamentals. We see prices as being increasingly oversold given the supply fundamentals.
Vedanta's Lisheen mine in Ireland has made its last concentrate shipment - the mine started up in 1999 and has been producing around 165,000 tpy of contained zinc and 20,000 tpy of contained lead.
Although the latest ILZSG data shows a supply surplus in the first 11 months of 2015, there were deficits in October and November. We expect more deficits in the months ahead while cuts announced in and since October as well as the large mine closures rein in supply. The fact the market is not taking note of this plus other signs of tightness such as lower treatment charges and generally downward-trending LME stocks suggest the market feels comfortable that there is good availability still.
The fact LME inventories saw inflow of 40,000 tonnes over the January date highlights that there are large stocks held off market, which may well be why the market is not paying too much attention to the current fundamentals. Still, Thursday's large warrant cancellation of 40,275 tones has topped up the cancelled warrants, which now represent 19 percent of total stocks compared with a recent low of six percent.
The C-3s spread is firmer at $2.25-0.25 contango, having averaged $17.9 in December - some large positions have built up, with one entity holding 30-39 percent of the warrants, 'tom' and cash positions. Holdings were more concentrated around the January date so they have eased since then but in recent months there have generally been few instances of large position holders of nearby metal so it looks that much tighter now.