'Zinc prices to retreat on rising LME inventories'

The commodity space saw varied movements by different commodities last week. The base metal complex was the worst hit after Trump threatened to impose new tariffs on Chinese goods from May 10.

Zinc prices were hit the most losing almost 5 percent, nickel and lead both ended 2.5 percent lower while aluminium was the only gainer, closing 1.9 percent up last week. Amongst precious metals, comex silver prices lost 1 percent during the last week on the fear that global retreat may dampen industrial demand for silver.

Gold prices instead remained steady on account of safe haven status and as the bond yields started to rise. Energy complex ended mixed with Nymex crude ending flat on uncertain demand outlook and supply tightness while Nymex natural gas closed the week with 1 percent gain.

On the base metals side, zinc is losing its appeal after the LME inventories started to rise since last month shifting the investors and fund managers focus towards its upcoming supply. The LME inventories started to increase after its market moved in a backwardation of more than $100 per tonne.

The rising TCRC charges also confirmed the supply increment as the smelters would seize the opportunity by raising its production in the coming quarter. The refined production in China, world’s largest producer of zinc, is expected to increase 5 percent in June which will be a 15 percent rise as compared to the previous year.

Globally, the International Lead and Zinc Study Group expects the market to remain in deficit of 120,000 tonnes in 2019, much lower deficit than the last year. Traders are waiting to sell the metal as many Put options are placed and speculators are cutting their bullish LME zinc bets by 10,280, net-long positions to 40,612.

With the lack of optimism seen on the demand front and incoming increasing mine supply, we believe Zinc prices are unlikely to find respect on the upside. The unsettled trade worries suggest demand downfall is underway.

If the US-China trade deal remains unsettled, we believe LME Zinc prices to remain under selling pressure with prices falling towards $2,500-$2,450 per tonne. Currently, the LME Zinc prices are trading at $2,650 per tonne.

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