SHANGHAI, Jun 15 (SMM) - LME zinc: The unpredictable pace of the US Fed shrinking its balance sheet weighed on base metals market in the first half of May. Bears entered the market after the European Union proposed to impose an embargo on Russian oil, sending LME zinc to a low of $3,451/mt. Despite the US Fed's tough stance on scaling back its balance sheet, the continuous decline in LME zinc inventories allowed LME zinc prices to rebound to $3,770/mt in the second half of the month. Crude oil prices hit a two-month high at the end of May, while LME zinc prices also went up slightly with the entry of bulls. 

SHFE zinc: In the first half of May, the TCs of domestic zinc ore dropped by another 100-300 yuan/mt in metal content, while smelters showed little interest in imported ore due to the closure of the import window. Bearish macro sentiment and falling LME zinc weighed on SHFE zinc prices. Due to steadily climbing zinc ingot social inventories across China’s seven major markets and pessimism over the consumption under pandemic control measures, SHFE zinc dropped further to around 25,500 yuan/mt. In the second half of the month, the People’s Bank of China announced that the mortgage rate of first-time home buyers would be lowered and the LPR with maturities longer than five years would be reduced to 4.45%. Although the SHFE/LME zinc price ratio rebounded, the shipment period and import volume of zinc ore were unknown. Tight zinc ore supply provided cost support to zinc prices. SHFE zinc prices climbed further at the end of the month as zinc ore shortages forced some smelters to halt their production and as China introduced policies to boost the water conservancy, transportation, infrastructure and other fields.

Spot market: The spot zinc market in Shanghai was quiet through much of May as both arrivals and sales were hit by the COVID lockdown. However, transactions picked up in late May with the gradual recovery of logistics, allowing spot premiums to stabilise. Affected by the aluminium ingot collateral scandal, some zinc ingot holders rushed to sell in early June, while downstream buyers stood on the sidelines, turning spot premiums into discounts of 80 yuan/mt. The spot discounts may reverse into premiums in the second half of June after market sentiment stabilises and panic-induced sell-offs decline. In Tianjin, zinc ingots that were originally intended for exports flowed into the spot market while downstream buyers restocked only as needed, creating an oversupply and weighing on spot premiums and discounts in mid-to-late May. The market attention shall be focused on the recovery of consumption and the speed of destocking. The spot market in Guangdong also performed poorly. Due to the COVID lockdown in Shanghai, more zinc ingots were shipped to Guangdong. Sluggish consumption of die-casting zinc alloy weakened the demand for zinc ingots. The market is expected to remain weak in the future.

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