Financial Services Association, May 29 (Reporter Liang Xiangcai) “It has risen too much. After closing in the morning, orders were suspended this afternoon.” Today, when the Shanghai-Zinc contract was rapidly rising, some traders suspended taking orders due to the rapid rise in spot prices. This situation is not common.

Zinc prices have been rising one after another in recent days due to the tightening of fundamentals and positive macroeconomic expectations. A number of industry interviewees told the Financial Federation reporter that currently high zinc prices are not well transmitted from the mining side to the bottom. Some midstream smelters are losing money due to plummeting processing fees, and the downstream processing side is experiencing a “big factory cuts production and small factory stops production” situation; in the context of the tightening and difficult reform of the mining side, the interviewees are optimistic about future long-term zinc prices.

In terms of individual stocks, today, Tibet Everest (600338.SH), Luoping Zinc Electric (002114.SZ), and Zinc Industry shares (000751.SZ) rose more than 4%, and Zhuye Group (600961.SH) rose and stopped during the intraday period.

A zinc alloy ingot production workshop in South China (interviewee's photo)

Mining end tightens, zinc prices rise

Since April, zinc prices have continued to rise. Today, the Shanghai Zinc Main Link has reached the 25,000 yuan/ton mark, a high of nearly a year and a half.

“From last week until now, it has risen by 1,000 yuan per ton, and I can't understand the current price.” Some traders lamented the recent rise in zinc prices.

A staff member at Mount Everest in Tibet told a reporter consulting as an investor that the company's zinc concentrate sells very well. It is exported according to the long single point price method, and there is almost no inventory.

“Improved macro expectations and tight supply on the mining side are the two main lines of the rise in zinc prices in this round.” Wei Linjun, a non-ferrous analyst at the Eastern Stock Exchange Derivatives Research Institute, told reporters that in early April, mining side disturbances occurred frequently, compounded by a recovery in overseas economic data, which contributed to the first wave of rising zinc prices; subsequent weakening of the US dollar and domestic real estate policies were frequent. Combined with the closing of the import window, TC continued to decline, and continued to boost zinc prices. However, at the same time, the demand side of zinc has not performed well, and downstream physical construction has been weak, causing the inflection point of storage to be delayed.

Zinc ore processing costs have dropped sharply, indicating expectations of tight supply of remote zinc ore. According to agency data, since the first quarter of last year, processing fees for domestic zinc concentrate have almost dropped, and processing fees for imported ores have dropped by nearly 90%.

Some industry insiders told the reporter that in recent years, about 40% of the domestic supply of zinc concentrate needs to be imported to meet it. Currently, processing costs for overseas mines have been drastically reduced, and the enthusiasm for imports has been seriously hampered.

According to Mysteel data, Mysteel's Chinese sample zinc concentrate company produced 266,800 tons in April, down 5.22% year on year; in April, China imported 287,500 tons of zinc concentrate, down 10.22% year on year; as of May 24, zinc concentrate port inventory fell to 80,000 tons, reaching a low point in recent years.

Poor price transmission “cuts off the biggest cake” on the mining side

“There is no shortage of stock, and prices are still rising. I feel very uncomfortable. The entire industry chain only makes money on the mining side.” Liu Feng, general manager of a trader, lamented to reporters about the continuous rise in zinc prices in recent days.

Furthermore, several industry insiders told the reporter that the current high zinc prices are clearly suppressing downstream demand. Most of them have just needed to pick up the goods. There is a situation where “small factories are on vacation and large manufacturers cut production”, and “profits are clearly being squeezed by costs.”

The Financial Services Association reporter learned from Chihong Zinc-Germanium (600497.SH) as an investor that downstream demand has not been as hot as the recent sharp rise in zinc prices. The actual production output on the company's mining side can meet roughly half of its smelting needs, and the shortfall needs to be outsourced.

Wei Linjun told the reporter that since downstream demand for zinc has always been weak, and most of the spot side is just in need of transactions, the tight mine side is difficult to quickly transfer to the zinc ingot end, which has led to the concentration of profits in the industrial chain on the upstream mining side.

Du Xiaoyu, a zinc researcher at Shanghai Steel Union, told the reporter that recently most of the profits in the zinc industry chain have been occupied by mining companies, and smelter profits are low or even losing money. On the downstream side, the cost of galvanized sheet coils has risen since April, and profits have declined markedly; since the rise in zinc prices, the number of orders for zinc alloy and zinc oxide has declined. Coupled with the decline in zinc alloy processing fees, profits for these two types of products have decreased.

With the decline in concentrate processing costs and the rise in zinc prices, domestic mine profits have clearly risen from a low level. According to SMM data, the profits of zinc concentrate companies have recently remained around 7,000 yuan/ton, which is the middle and upstream range of profits for the past ten years; on the smelting side, as of May 28, the production profit of refined zinc companies (excluding by-products) was -676 yuan/ton.

In terms of inventory, zinc is currently in a state where seasonal storage is poor. According to Choice data, as of May 16, domestic social stocks were 215,000 tons, which is near a two-year high; London's total LME zinc inventory is about 250,000 tons, which is the high range for the past three years.

The mining side is getting tighter, and it is difficult to improve long-term zinc prices

In the context of the tightening of the mining side and improving macroeconomic expectations, industry insiders interviewed are optimistic about future long-term zinc prices.

“I would like the price to be lowered, so the downstream will pick up more goods, but now the price has risen more than we expected, and sales have become more conservative, and we are afraid of rising again.” Liu Feng told reporters with mixed feelings.

As zinc prices continue to rise, the psychological reserve prices of people in the industry chain are also being forced to rise. Some traders told the reporter that downstream is generally expected to start purchasing when zinc prices fall back to around 23,500 yuan/ton, but if it falls to 24,500 yuan/ton, their own company will have to start receiving goods.

Chihong Zinc-Germanium staff said that in recent years, newly discovered zinc-containing mines have been very limited, and existing mines generally have a trend of using deep well mining due to the long mining period. As mining costs rise and ore quality declines, some mines have chosen closed mines to reduce production at high costs.

Guan Dongming, an analyst at Shanghai Steel Union's Lead and Zinc Division, told reporters that zinc prices are expected to fluctuate strongly in the short term, and the upward trend may continue until the third quarter. The main contradiction in the current industrial chain is the shortage of mining in the country. Despite falling processing costs, the price of by-products such as gold and silver has risen, giving smelters a certain amount of production momentum. Therefore, currently large smelters have no intention of drastically reducing production, so the conflict between supply and demand between the mining side and smelting will continue.

Wei Linjun said that although there are many opinions on zinc prices, the subsequent rise may be driven by a slow shift from macroeconomic expectations to fundamentals. On the supply side, overseas mine supply is tight and expectations have come to fruition. There is still a phased shortage on the mining side in the second half of the year; domestic mining rush intensified, and some refineries in Hunan have stopped production due to a shortage of raw materials. On the demand side, the domestic May-June special bond issuance plan has increased, and issuance is expected to accelerate. Coupled with the trade-in policy, it can be expected that the trade-in policy will gain momentum, and physical construction has already shown a marginal recovery. The ingot side may face a shift from easing to tightening.

A recent research report by Minmetals Securities mentioned that judging from the supply cycle, it is believed that zinc is currently at the end of the production expansion cycle. In the medium to long term, irresistible factors are ruled out. It is expected that after a production release period from the second half of 2024 to 2025, the supply gap may widen starting in 2026, opening up room for zinc prices to rise.

(Liu Feng is a pseudonym in the article)