The Zhitong Finance App learned that Dongwu Securities released a research report saying that zinc prices hit a multi-year high. As of early April 2022, the spot price of zinc ingots was 28,200 yuan, a record high, up 70% from the bottom of 2020. Considering that overseas supply will remain scarce in the short term, and domestic supply will remain low, the bank expects that the transmission of overseas prices to the domestic market will be relatively certain and will be sustainable; the rise in overseas mining processing fees is also expected to increase smelting side profits. Investment suggestions: 1) For those with a high degree of integration of mine+smelting, and there are still targets for increased production capacity, it is recommended to focus on: Chihong Zinc-germanium (600497.SH), Zhongjin Lingnan (000060.SZ); 2) For pure smelting, highly elastic targets, it is recommended to focus on Zinc Industry Co., Ltd. (000751.SZ).

The views of Soochow Securities are as follows:

Inventories increased and decreased, and import losses were huge.

As of April 2022, LME was only 120,000 tons, down 59% from the previous high (April 2021); SHFE stocks have accumulated sharply to 126,000 tons, which has reached an all-time high, up more than 1500% from the bottom (July 2021). Since 2020H1, due to differences in supply and demand patterns at home and abroad due to the pandemic, the ratio between Shanghai and the renminbi fell to 6.4 in April 2022, a record low. Reflected in import and export profits, the bank estimates that the import loss of zinc reached 4,000 yuan/ton in early April 2022.

Imports have been reduced, and processing costs have increased dramatically.

Domestic and foreign price comparisons have declined, and imports have dropped sharply. As of February 2022, China's net imports of zinc ingots were only 90,000 tons, a record low. The reduction in imports of zinc ingots also affected imports of zinc concentrate. Since the Spring Festival, Mysteel's zinc concentrate stocks in China's main port have continued to decline. As of April 2022, the decline was close to 50% compared to the beginning of the year. Processing fees for imported ores rose 176% from the beginning of the year. In a situation where the supply of imported ore is low, but processing costs are still rising sharply, the bank believes that it is more a bottleneck in production capacity at the smelting side.

Under supply bottlenecks, the supply and demand pattern continues to improve.

On the supply side, the cumulative production of zinc ingots fell nearly 2% year on year from January to February 2022; in March 2022, the operating rate was 80.05%, down 1.5 pct year on year. As the main downstream of zinc, the operating rate of galvanized sheets increased slightly in April 2022, increasing 1.7 pcts month-on-month and 2.5 pcts year-on-year. Looking at the terminal, although the real estate market continued to be sluggish at the beginning of the year, the downward trend in the real estate market may gradually slow down with the loosening of property market policies in various regions. Therefore, the bank believes that starting in April, as demand in infrastructure and other fields picks up, demand for zinc will rise further. Considering high-cost production cuts overseas, domestic zinc companies are affected by electricity restrictions, and the zinc supply and demand pattern is expected to improve for a long time.

Smelting side profits increased. In April 2022, the gross profit per ton of zinc smelting reached 120 yuan. The bank believes that at a time when the ratio of zinc to Shanghai has fallen to a record low, exports have increased a lot, price transmission channels are smooth, and the new domestic and foreign price ratio is expected to be repaired, then domestic zinc prices are expected to continue to rise; furthermore, rising processing costs mean that profits will lean more towards the smelting side, and zinc smelting companies are expected to fully benefit.

Risk warning: demand falls short of expectations; monetary policy is tightened; supply exceeds expectations.