Zinc and Aluminum 30-Day Forecast (Metal Miner)

Zinc to Stay “Range-Bound” at Best

Last month we reported the International Lead and Zinc Study Group suggested 2015 demand for refined zinc would exceed supply by 151,000 metric tons. Those numbers have turned out to be wildly wrong – in fact zinc supply is running a surplus to the tune of 181,000 metric tons. In addition, buying organizations will want to pay careful attention to the flow of metal into the LME warehouses.

According to the most recent LME data available, zinc stocks declined in May by some 57k+ metric tons but some analysts believe that just the opposite will happen through July – more inventory will make its way into LME warehouses than out of them. In addition, plenty of extra inventory exists in non-LME warehouses throughout Asia and the United States.

Market sentiment toward zinc has hinged on the supply/demand equation and it has become a little less likely that any real zinc shortage will materialize.

The Outlook

Three month zinc fell significantly in June, closing at $2000/mt. As with lead, zinc’s rally this spring wasn’t sustainable in the face of a bearish commodity market. In the long-term we expect zinc prices to stay range-bound at best.

Aluminum Prices to Keep Trending Lower

Aluminum continued to fall throughout June closing at $1686/mt, a 3+% decline from our previous monthly report and just above key support levels. The back-story remains exactly the same as one month ago in terms of global oversupply, falling MW premiums and the potential return of the stock and financial trade. What has changed are some of the details within each of these drivers. Non have fundamentally changed the monthly outlook.

It’s All in the Output

World production of primary aluminum has grown 12% from one year ago. This is the fastest growth rate since 2011. The notion that China will curb production remains a pipe dream. In fact, global producer UC Rusal pointed to rising Chinese aluminum exports as evidence of no checks on Chinese aluminum production. Combine that with a new “Make in India” campaign and we see a similar situation developing there – more capacity. The bottom line: aluminum prices may need to fall further and it will be the non-Chinese producers that take our capacity.

Last month this report indicated that conditions appear “ripe” for the stock and financial trade – a strong forward curve combined with low interest rates may be all that is needed to soak up excess inventory and re-start the warehouse trade. Metal Miner analysis of LME data, however, suggests that total tonnages stored in Detroit warehouses are indeed declining meaning we don’t yet see any evidence of the return of the stock and finance trade. Nevertheless, aluminum buying organizations will want to pay close attention to this development.

In the meantime, semi-finished aluminum prices are under pressure. Physical delivery premiums have come down nearly to their historic levels of $100-$125/ton and mills are short of work so the conversion premium is under considerable pressure. In Europe, a weak Euro is helping mills export but there is limited demand placing downward pressure on prices.

The Outlook

Metal prices are falling across the board and some of them have already fallen below key support levels. Based on current market conditions, it’s likely that aluminum prices will keep trending lower. Therefore, making long term commitments is not a good idea until we see real signs of strength.

We do, however, leave open the possibility of rising premiums as an indicator of the resumption of the stock and finance trade.

Metal Miner makes short-term buying calls for their readers and SMU readers can see their call by going to their website or clicking here. Ms. Reisman will be one of the speakers at this year’s Steel Summit Conference where she will present their September forecast and sourcing advice.