LONDON (Commodity Online): Over the past few weeks, the zinc SHFE nearby spreads have tightened and are currently trading in a small backwardation. The SHFE/LME spread has also been slowly improving in recent months, said Barclays Capital in a research note.
Does this signal a turning point for the zinc market?
Zinc is the metal Barclays has been least positive on for some time because of its persistent surplus and ample supply. But global inventories have stopped building, which suggests that, at least for now, the market has moved closer to balance than surplus. This is partly because something of a supply response to lower prices has begun to emerge in China.
The response has been twofold
First producers, miners and refiners, have been holding back from selling at lower prices. While this may provide some support through tightening spot supply, in bank’s view it is likely to be only temporary since limited credit will restrict producers’ ability to finance this inventory for long. So, if prices don’t recover these stocks are likely to be swiftly sold off. Nevertheless, withholding this material at a time when smelters typically stock up on concentrate ahead of the winter months (when supply from the Northern provinces weakens) has exacerbated the tightening effect, which brings us to the second supply response.
“We understands that some of the smaller mines in Northern provinces have closed early as a result of weak market conditions, further reducing spot supply. This didn’t show up in the October production data (in fact production kept growing strongly), though we have come to increasingly mistrust the Chinese production data because of known problems and irregularities for a number of the base metals,” Barclays added.
Nevertheless, it would seem that the supply responses by Chinese zinc producers have tightened the domestic market. The resulting tightening in spreads could attract unreported inventory into SHFE warehouses, or (along with falling domestic TCs) support concentrate imports over the coming months. Providing the weakening in demand does not outpace the tightening in supply, it should also help to cushion the downside for prices should the macro environment worsen. According to Barclays, this does not constitute a reason for being fundamentally bullish on zinc at this point in time.
