Analysis: LME zinc price sees risks ahead
SMM believes the LME zinc price may stay on its current upward-moving track with historical low inventory and demand from the reconstruction activities in the US. However, we also see irrational factors supporting the price rise and potential risks ahead.
With stronger LME zinc price but a weaker SHFE contract, there is limited room for marginal supply to go lower whereas demand sees downside due to deleveraging exercises among businesses and governments. A correction in LME zinc price may be the way to go when the spread normalises.
In China, zinc social inventory and stockpiles at the exchange and bonded warehouses have all been rising. According to Dongwu Futures analyst Chen Long, high zinc prices would also incentivise supply addition while demand is entering the off season.
SMM believes LME zinc inventory and spot premiums would be key to future price movement. If higher spot premiums incentivised sellers to stockpile, the rise in zinc prices may be more rational.
As of January 8, LME zinc inventory stood at 180,325 mt, down close to 58% from 427,225 mt at the start of the year. Spot premiums were heard at $20-30/mt.