Zinc prices surged sharply in August, driven not only by the broader bullish sentiment across precious and base metals but also by fundamental tightness in the upstream supply chain, including constrained mining output, heavy refinery maintenance, and tight overseas supply. Shanghai zinc has already broken through the 27,000 yuan per tonne mark, while LME zinc is gradually approaching its historical highs from 2022.
Federal Reserve rate hike expectations are creating market volatility, and shifts in sentiment warrant close attention. The Fed Chair's hawkish tone at the recent global central bank conference, emphasizing the commitment to controlling inflation, has pushed the probability of a September rate hike to around 60%. While short-term Treasury yields have jumped, longer-dated yields have remained relatively stable, and the pressure this initially placed on non-ferrous metals has quickly dissipated, although long-end yields remain elevated. This week, the US will release August non-farm payroll data; July's unexpectedly weak employment figures previously cooled rate hike expectations, so this upcoming data could once again trigger shifts in market sentiment. The mid-September FOMC meeting is the next major focal point, with the actual rate decision and officials' guidance on the future rate path serving as key references for trading strategies.
China's August manufacturing PMI edged up 0.6 percentage points month-on-month to 49.8%, indicating a slight improvement in business sentiment, although it remains below the expansion threshold. New orders saw a comparatively stronger recovery.
Mine supply tightness persists, with processing fees expanding deeper into negative territory. On the supply side, global forecasts for zinc mine output growth have been repeatedly revised down this year, with the top 17 overseas mining companies reporting an approximate 9% year-on-year decline in H1 production. According to the International Lead and Zinc Study Group (ILZSG), global zinc mine production reached 1.03 million tonnes in June, a month-on-month increase of 33,000 tonnes. Cumulative output for January to June totaled 5.951 million tonnes, a year-on-year decrease of 158,000 tonnes, or 2.6%. Reflecting shrinking overseas mine supply, import processing fees for zinc concentrate in China have continued to expand into negative territory, with the SMM import TC index falling to -$123.25 per dry metric tonne last week. China's zinc ore imports saw some recovery in July, up 17.3% month-on-month to 425,600 tonnes, though still down 15.2% year-on-year. Cumulative imports for the first seven months reached 3.187 million tonnes, up about 5% year-on-year. Domestically, SMM data shows total Chinese zinc ore output for the first seven months at 2.179 million tonnes, up 5.4% year-on-year. However, with frequent supply disruptions at domestic mines since August, output recovery is expected to be limited. Refiners are increasingly sourcing domestic concentrate, which, amid intensifying tightness, has accelerated the decline in domestic processing fees. The SMM domestic TC fell to -1,850 yuan per metric tonne last week, with mines indicating further reductions planned for September. By the end of August, refinery raw material inventories stood at 242,000 metric tonnes, providing about 17.9 days of coverage, a relatively low level. As of last week, zinc ore inventory at major ports was 283,000 tonnes.
Domestic refined zinc production is struggling to increase, while overseas short-covering risks remain. On the refined zinc supply side, ILZSG data shows June global refined zinc production at 1.1206 million tonnes, continuing its month-on-month decline and down 3.8% year-on-year. Cumulative output for the first half totaled 6.856 million tonnes, with year-on-year growth slowing to 1.3%, resulting in a market surplus of 120,000 tonnes. According to the National Bureau of Statistics, China's July refined zinc output was 629,000 tonnes, down 18,000 tonnes month-on-month and 0.8% year-on-year. Cumulative output for the first seven months reached 4.379 million tonnes, with the growth rate slowing to 4.2%. SMM data indicates August domestic refined zinc production at 572,200 tonnes, a slight month-on-month increase of 14,600 tonnes but down 8.6% year-on-year, reflecting some resumption of output after refinery maintenance. However, with the sharp decline in zinc concentrate processing fees and a pullback in by-product sulphuric acid prices, despite revenue support from higher zinc prices, raw material shortages will constrain future output growth. By the end of August, domestic refined zinc inventories depleted noticeably. This Monday, SMM's social inventory across seven regions fell by 18,900 tonnes week-on-week to 251,000 tonnes. SHFE total zinc inventories also turned lower last week, with warrants dropping by over 10,000 tonnes in the past two days. Spot quotes in the domestic market remain at a slight discount, suggesting the supply-demand contradiction is not yet acute. Recently, LME registered zinc warrants have fallen rapidly to below 70,000 tonnes, with total inventory under 100,000 tonnes. The 0-3 cash premium has surged above $200 per tonne, heightening the risk of a short squeeze in the overseas market.
Demand shows no significant improvement, with the peak season yet to be verified. Zinc demand has yet to show clear signs of improvement. Following the price surge, downstream consumers are cautious and hesitant to purchase, with fewer inquiries. Galvanized pipe sales are lackluster, though substantial production for some tower orders nearing delivery deadlines offers some resilience. Die-cast zinc alloy producers are facing headwinds from weak downstream purchasing intentions, environmental inspections, and typhoon weather. Zinc oxide terminal consumption is generally flat, though orders from large manufacturers remain stable. In end-use sectors, China's real estate development investment fell by 19.2% year-on-year in the first seven months, with new construction starts down 24% and infrastructure investment down 3.6%. The pressure on traditional sectors remains significant. In white goods, July output growth for refrigerators and freezers was decent, but air conditioner and TV production continued their year-on-year decline. Industry data shows scheduled production for air conditioners, refrigerators, and washing machines in September totals 27.21 million units, a 4% year-on-year decrease, with the contraction slightly narrowing. July automobile production and sales continued their year-on-year declines, falling 0.7% and 0.3% respectively. However, new energy vehicles maintained good momentum, with output and sales growing 26.8% and 23.7% respectively.
In summary, on the macro front, Fed rate hike expectations are creating market fluctuations, with attention focused on the upcoming September FOMC meeting. On the supply-demand front, global zinc mine supply is gradually tightening, domestic mine output is struggling to recover, and processing fee declines are widening. Although higher zinc prices provide some revenue buffer for smelters, the real shortage of raw materials is limiting refined zinc output. Domestic refined zinc inventories are declining rapidly, LME registered warrants have also fallen significantly, and the 0-3 cash premium has risen to high levels, increasing the risk of a short squeeze and providing ongoing momentum for higher zinc prices. Demand is relatively ordinary but shows some resilience, with potential for improvement after September. Overall, the short-term focus remains on supply-side tightness, suggesting zinc prices may still have upside room. A cautiously optimistic stance is maintained, while monitoring potential macro sentiment swings.
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