By Andy Home
LONDON- The spread of the coronavirus has hit the entire London Metal Exchange (LME) base metals complex as fears grow over the demand shock travelling out from China.
Zinc has been hit the hardest of all.
At a current $2,010 per ton, the London three-month zinc price is down by 13 percent on the start of January, the weakest performance in a weak pack.
Zinc touched a near four-year low of $1,970 on Feb. 28 and has struggled to stage a convincing recovery over the course of this week.
Funds have been piling into zinc on the short side. LME broker Marex Spectron estimates net speculative short positioning reached 32 percent of LME open interest on Tuesday, the largest collective bear bet since November 2015, when it peaked at 38 percent of open interest.
Meanwhile, in China the market “is running record shorts” on the Shanghai Futures Exchange (ShFE) zinc contract, Marex said.
Zinc’s problem is that the coronavirus has darkened further an already bearish outlook.
Stocks of zinc registered with the ShFE have mushroomed from 28,054 tons at the end of December to 162,402 tons.
Inventory build over China’s new year holiday period is normal. The scale of this year’s build isn’t normal. It already exceeds the peak seasonal increases of 104,000 tons in 2019 and 91,000 tons in 2018.
Quarantine and restrictions on travel have worked to slow the post-holiday return to work, disrupting the zinc value chain in China.
Moreover, zinc is particularly exposed to the economic impact of the virus via its use in galvanized steel in the automotive and construction sectors.
China’s giant automotive market was already struggling before the coronavirus. Now it is collapsing.
Passenger car retail sales in China fell 80 percent in February because of the coronavirus epidemic, according to the China Passenger Car Association.
Globalised automotive supply chains mean that this is not just a Chinese problem but could affect other countries’ automotive output.
An UNCTAD report this week cited carmaker Honda 7267.T as saying it would reduce vehicle output at two of its domestic plants in Japan’s Saitama Prefecture for a week or so in March due to concerns about parts supply from China.
The United Nations agency estimates a shortage of Chinese components caused a $50 billion fall in global exports last month, with the automotive industry one of the most affected.
Property sales in China have also collapsed, which may affect the sector’s ability to maintain construction and completion rates. That hits zinc due to its use in white household goods.
Some mitigation to this demand shock has come from disruption to China’s giant zinc production sector.
Henan Yuguang Gold and Lead, one of China’s biggest zinc and lead producers, has cut zinc output by 50 percent, or around 150,000 tons per year, because it has been unable to sell the sulphuric acid generated as a by-product of the smelting process.
Others have reduced operating rates or brought forward planned maintenance work to offset logjammed logistics affecting both their raw material and product chains.
The build in Shanghai stocks would probably be even more massive were it not for this supply-side offset.
Unfortunately for the zinc price, China’s producers are likely to return to normal operations before the downstream sector, meaning further increases in both visible exchange and off-market inventory in the country. – Reuters
