Zinc hits near three-month high as Shanghai supplies shrink

LONDON: Zinc hit its highest in nearly two months on Tuesday on falling stockpiles and rising Chinese premiums, but gains were capped by signs that growth in top metals consumer China is cooling.

Zinc inventories in Shanghai Futures Exchange warehouses are at more than decade lows and premiums - or surcharges for physical metal - in Shanghai of above $200 a tonne have hit their highest since November 2013, according to Bank of China International (BOCI).

"Refined zinc production in China has been low because of the smelter cuts (but) the demand side (is) not very robust either," said Xiao Fu, head of commodity market strategy at BOCI.

BOCI expects more downside pressure in base metals this year due to continued macro economic headwinds, but sees limited downside in metals like zinc and copper given inventory levels.

"We could see (more) buy on dips emerging," said Fu.

PRICES: Three-month zinc on the London Metal Exchange  closed up 0.3 percent at $2,665 a tonne after hitting its highest since early July at $2,728. LME zinc has risen around 16 percent since mid-September.

"Chinese zinc spreads are screamingly bullish - running at around their most backwardated level in a decade... likely driven by a combination of Chinese smelter output cuts and consumer stocking," Citi said in a note.

"Our base case is that (zinc) tightness in China is likely to spread to ex-China once the Chinese market is back from holiday and LME Week begins next week. We raise our fourth quarter forecast to $2,650 a tonne from $2,500," the bank said.

WIDER MARKETS: Global equities went south after anti-euro comments from an Italian party official weighed on the single currency, boosted the dollar and dampened risk appetite.

CHINA: Growth in China's manufacturing sector sputtered in September as both external and domestic demand weakened, two surveys showed on Sunday, confirming consensus views that the world's largest consumer of metals is continuing to cool.

HOLIDAY: Traders expect subdued activity this week due to Chinese holidays.

STEEL: China's Hebei province, the country's biggest steel producer, will force all its mills to comply with strict new emissions standards by 2020 as part of its campaign against air pollution, according to newly published industry guidelines.

PRICES: LME copper ended up 0.5 percent at $6,280 a tonne, aluminium finished 1.7 percent higher at $2,118, lead gained 1.5 percent to $2,061, tin closed down 0.1 percent at $18,955 and nickel ended flat at $12,515.