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Zinc rally to slow in H2 as headwinds mount – BofAML

24th June 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – Headwinds to the current zinc price rally are expected to mount during the second half of the year as consumption slows, undermining the base metal’s strong fundamentals, new analysis by Bank of America Merrill Lynch (BofAML) has found.

The banking group’s Global Commodities Research team said in its latest ‘Global Metals Weekly’ report that a rebalancing of the zinc market has been visible in the usual indicators in China: mine supply has remained subdued partially because the government made restarts difficult; smelters are running at capacity utilisation rates of lower than 70%; and refined zinc prices on the Shanghai Futures Exchange (SHFE) have outperformed those on the London Metals Exchange (LME), opening the import arbitrage and, as a result, refined zinc shipments to China have rebounded.

“While we acknowledge strong fundamentals at present, we are concerned about a likely slowdown in zinc consumption through the second half of the year, which is picked up by virtually every of our global business cycle models. As such, we believe the current rally is unlikely to be sustained,” the analysts noted.

BofAML stated that, despite the price of zinc rallying, it has not been the outperformer.

Having been the best performing base metal last year, zinc price movements have been more subdued moving into 2017.

“In our view, this has been driven by a confluence of factors, including concerns that much of last year's rally was driven by mine production cuts, which for a long time did not show in fundamentals on the refined market. To that point, while treatment charges fell by 85% to $30/t in January, physical premia had barely moved by then. Concerns over a large unreported refined inventory overhang also affected sentiment,” the research group found.

Having said that, the physical market has tightened markedly in recent weeks, with premia rising in Europe, the US and China.

This was accompanied by steady stock draws at warehouses on SHFE and LME; cancelled warrants have also risen visibly, suggesting that metal outflows from warehouses will persist. “Beyond the issues on the supply side, this was also influenced by global galvanised steel production, which has expanded by 4.6% so far this year. Putting it all together, our average premia index suggests that zinc prices just below $3 000/t ($1.36/lb) are justifiable at present,” BofAML said.

Edited by Creamer Media Reporter

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