SMM

As delivery approaches, the total open interest for SHFE zinc increased from 317,000 lots at the beginning of the week to 343,000 lots, with bulls/longs funds flowing in again. Although the price spread between near-month contracts has fallen, it remains high at around 400 yuan/mt. Coupled with the fact that the ratio of cancelled LME zinc warrants was as high as around 37%, the short squeeze trend continues, and the enthusiasm for funds remains unabated. There are market concerns that the squeeze might continue even after the delivery is completed. Is there support on the fundamentals side? From the supply side, smelter raw material inventories have further increased to over 20 days, easing the pressure on smelters, and the processing fee has further risen to 1,500-1,800 yuan/mt (metal content). Looking at the smelters' winter stockpiling and arrival situations, the TC is expected to increase further by the end of the year. In terms of production, although the current profits of smelters, excluding sulphuric acid and by-products, are still at a loss of about 1,600 yuan/mt, the loss has decreased. With the increase in zinc concentrate inventories, refined zinc production in November unexpectedly increased to 509,800 mt, and December production will further increase to 536,500 mt. It is expected that production in January will also exceed 530,000 mt. The continuous increase in smelter production is reducing the support from the supply side for zinc prices. On the consumption side, as the year-end approaches, it is already the off-season for consumption. Construction in the north is hindered, and there is a brief gap in "rushing exports" in December. Additionally, some small enterprises might take an early Chinese New Year break at the end of December or the beginning of January, limiting further efforts in consumption. In terms of inventory performance, although SMM social inventory is still destocking to 91,400 mt, the destocking amount during the week was less than 1,000 mt, significantly slowing the pace of destocking. With the increase in smelter production and the successive arrival of goods in transit, subsequent inventories are likely to increase, weakening the support from inventories. Overall, the fundamentals side of zinc provides insufficient support for the "squeeze" market trend. Attention should be paid to macro factors and changes in fund positions.