Zinc

[Lone Clone]

MI WEEK IN REVIEW: Falling zinc stocks catch out technical bears

http://www.metalsinsider.com/WIR/20070604zn.html

Metals Insider - 04 June 2007

MI WEEK IN REVIEW: LME zinc trading last week took its cue from a nervous copper market, which was gradually regaining some of its old poise after the previous two weeks’ storm of selling from technical funds.

Zinc has taken its own battering since the start of May, crystallized by our sources’ estimate of the shift in positioning by the CTA systematic fund community—a move from collective long of 20% of historic capacity to 10% short as of Friday, May 25.

Such chart-based funds showed every sign of wanting to add to that short position last week, the collective position increasing to around 15% by Thursday before being reined back in to around 10%.

As such, they kept a cap at $3,700 on zinc’s attempts to move away from the $3,550 level, which is currently being underpinned by the 200-day moving average.

Intraday trading was choppy and largely inconclusive with the LME metals spooked by a sharp corrective sell-off mid-week in the Chinese stock markets, confused by the usual argy-bargy of the month-end window-dressing and slightly disheartened by the absence of any evidence pointing to fresh fund allocations at the start of the new month.

All this saw zinc gyrate within its $3,550-3,700 range for most of the week until something interesting happened on Friday.

LME 3-month metal made an early break up to the $3,750 level—thanks to another ominous LME stocks report (more cancellations)—and despite the later pull-backs by the likes of copper—no expected sprinkling of the magic bull fairy dust of new investment flow—it closed strongly on the back of a bout of short-covering on the spreads.

The full cash-to-3-months period flexed sharply tighter to end the day valued at $17.25 backwardation, compared with just $2 backwardation the previous day. That helped 3-month metal close the week out at the highs of $3,760—a week-to-week gain of $120 after the previous three weeks’ cumulative $530 of losses.

Stocks Crunch?

That sharp Friday movement in the spreads—although no doubt exaggerated in the count-down to the weekend—was a timely reminder of the structural imbalance of this market. The CTA funds and other parts of the investment community have chosen once again to go collectively short of zinc, just at the time that LME stocks have started falling again.

LME stocks fell by a net 19,150t, or 21.6%, over the course of May with the headline figure recording fresh cycle lows with just about each passing day. Draws have been less than exciting on a day-by-day basis but inflow has also become a lot more sporadic with each passing week.

Wednesday and Thursday both saw cancellation activity accelerate and the ratio of cancelled tonnage in the LME system rose to 12.6% Thursday, suggesting that the current downtrend will be extended and could even accelerate if fresh arrivals continue to dry up.

Our view is that we are now entering a key time for the zinc market. Mined production is now starting to accelerate as more new projects and restarts get underway. This will be a cumulative process over the rest of 2007 and 2008, last week bringing confirmation that the Middle Tennessee mines are due to be re-opened by the end of this year and that CBH Resources’ new Rasp mine in Australia will be fast-tracked for a Q3 2008 start.

However, the world’s galvanisers and other zinc consumers cannot use concentrates. Until this surge of mine production travels through the production chain to take the form of metal, the market will have to rely on dwindling LME stocks to make good any shortfall.

A surprise surge in Chinese exports of metal has delayed this ticking clock but the country flipped back to net importer in April, which does not seem to be coincident timing with the renewed downtrend developing in LME inventories. It’s worth pointing out that there is a complete lack of consensus among analysts as to whether China will now stay consistent net importer or return as net exporter in the coming months.

But right now the cushion of Chinese exports is not there. That’s feeding through into renewed demand for LME-warranted metal and that’s left the spreads at the front end of the LME forward curve susceptible to the sort of volatility we saw late Friday.