Commodity Strategy - Supply Cuts To Support Zinc's H116 Gains - SEPT 2016


BMI View: We revised our 2016 zinc price forecast slightly higher, to USD1,950/tonne, following a stronger-than-expected rally in the first half of the year and the tightening market balance providing support for these gains over the coming quarters .

We have revised up our 2016 zinc price forecast slightly, to USD1,950/tonne, from USD1,900/tonne, as the impending zinc ore shortage will tighten the market sooner than we expected. For instance, the cash 3-month price spread has steadily moved toward backwardation, hitting USD5.8/tonne on August 24 from a low of negative USD18.3/tonne on January 4. Our 2016 forecast of USD1,950/tonne implies a neutral view toward the metal over the second half of the year, requiring a USD2,020/tonne average based on the year-to-date (YTD) average of USD1,907/tonne as of August 24. Zinc is currently testing major trendline resistance following the 60% YTD rally, which we do not expect to be broken. This is in part due to the ongoing weakness in the Chinese yuan, which will cap additional price increases by slowing Chinese metal imports and encouraging domestic production in an oversupplied market ( see ' CNY Weakness Not Yet Over ' , August 22). That said, we believe that zinc supply rebalancing will prevent the price from dropping back down to support, and expect zinc prices to remain around current levels over the coming months.

Upward Pressure To Persist In Near-Term

Zinc To Maintain Recent Gains
LME Zinc 3 Month, Monthly (USD/tonne)
Source: Bloomberg, BMI

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