Mar 28 (LTIT) -The most traded zinc contract on the Shanghai Futures Exchange overnight climbed to a new high of this year, in anticipation of a consumption surge in April and with limited inflows of imported materials.
SMM historical data showed that domestic social inventories destockde significantly in April. In the week ended March 22, social inventories of refined zinc across Shanghai, Guangdong and Tianjin declined 10,100 mt to stand at 220,300 mt.
While April’s demand might have been somewhat depleted as buyers stepped up procurement in advance of lower value-added taxes, the anticipated consumption improvement still fuelled confidence among investors.
With limited inflows of imports, stocks of refined zinc in Shanghai-bonded areas stayed below 100,000 mt as of March 22, a relatively low level, SMM data showed.
Customs data showed that imports of refined zinc in February tumbled 70.59% month on month and 46.04% year on year. Zinc stocks across LME-approved warehouses extended declines towards lows since 2000. This prompted LME zinc to outperform its SHFE counterpart and lowered the SHFE/LME price ratio, which currently stands near record lows. Such arbitrage opportunities triggered some buying in Shanghai and bolstered prices.
Domestic supply constraints also cemented expectations across investors, of lower inventories.
Lower profits drove Chinese smelters to cut capacity for maintenance since the first half of 2018. This lowered domestic output.
While greater concentrate supplies overseas buoyed treatment changes and recovered profits that smelters could see in the second half of last year, domestic production failed to substantially rebound as two large smelters suffered production disruption. The two smelters have yet to recover to full capacity as of late March.
Output of refined zinc in China in the first quarter of 2019 is likely to stand lower than a year earlier even as a medium-sized smelter in Hunan that closed for more than a year, returns online.
Some smelters will undertake routine maintenance in April, which will impact production by over 10,000 mt. This further drove investors to add their bullish bets on SHFE zinc.
The government’s infrastructure push that started from late 2018 is likely to support zinc consumption.
Consumption recovery and limited imports are expected to reduce social inventories of refined zinc across Shanghai, Guangdong and Tianjin, to the 100,000 mt level.
The SHFE June contract, however, saw its short positions gain over 10,000 lots during daytime trading hours on Wednesday, on market expectation that the two large smelters will achieve full capacity in June.
SHFE zinc is expected to trade rangebound to await the pickup in consumption. |