Commodities Comment:Zinc is the focus

Macquarie attended Antaike Internal Zinc & Lead Conference last week,where over 1,000 delegates both from the industry and investment areaparticipated. Clearly, the recovery in zinc prices has reignited interest fromdomestic investors: The galvanising metal is now in focus.

    The bullish tone is rooted in the supply side, but not so much from the familiarstory of deficits in zinc concentrate supply, but the sluggish supply responsefrom Chinese zinc smelters. The change in financing conditions and shift insupply elasticity curve for Chinese zinc smelters lifts the incentive price forrefined zinc supply. Amid the surplus of zinc concentrate supply, RMB16,550/t($2,280/t ex-tax) is seen as the breakeven threshold for Chinese refined zincsupply on a total cost basis, although the reignited interest from investors andspeculative mood in the market could trigger a stronger price rally into 2015.

    Latest news

    China released preliminary trade data over the weekend. As expected, ironore and copper concentrate imports declined MoM by 9% and 28%,respectively, following the spike in the reported numbers in September.Despite the sequential pullback, iron ore imports were still up 17% YoY.Unwrought copper imports declined just 1% MoM, effectively holding on tothe recovery that started in September at the highest levels of imports seensince April. Steel imports were down sharply, falling 22% MoM meaning thatalthough exports fell 3% MoM, Chinas net exports rose 1% from Septemberand 90% YoY. Unwrought aluminium exports dipped 8% MoM but remain atan elevated level, up 19% YoY. Coal imports dropped 8% MoM and althoughOctober imports didnt fall below the August lows, import volumes are stilldown 44% from January. Coke exports rebounded in October, up 15% to820kt, the second highest level of the year.

    Iron ore stockpiles at smaller mills in China surged over the last two weeks,rising from 21.7 days of cover to 24.9. While inventory volumes rose 2%, themain reason for the sharp rise in inventory days was an 11% drop in impliedproduction. It seems likely that the cause of the drop in production wasenforced shut downs as part of the governments efforts to clamp down onpollution in Beijing during the APEC summit taking place this week. Accordingto Mysteel, shutdowns have affected 314 blast furnaces and nearly 245mtpaof steel capacity. While the impact of the shutdowns is severe, they arescheduled to stop on November 12.

    The UK exported 86t of gold in September, latest HMRC data shows, thehighest monthly total since February. Most of it went, as usual, toSwitzerland, 64t, also the highest figure since February and reflectinghigher ETF outflows seen in September (37t by our estimate). Exports toChina (10t) and Hong Kong (5t) totalled 15t, a similar amount as in recentmonths. Imports were 44t, with the bulk coming from Canada and the US.

    Workers at the Antamina copper-zinc-lead mine in Peru began anindefinite strike at midnight on Monday over a pay dispute. However, amine spokesperson stated that the shutdown was only partially affectingoperations a few hours later. The mine ranks #10 for copper output and#7 for zinc globally, based on 2014 (pre-strike) estimates.