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LONDON: The inclusion of zinc in China’s sales of state metal reserves is testament to the market’s continued surprising strength.

London Metal Exchange (LME) three-month zinc hit a near three-year high of $3,108.50 per tonne last month and is currently trading around $2,900.

The Shanghai Futures Exchange (ShFE) zinc contract has out-performed London, last month hitting its highest level since 2007.

There is no evidence of the speculative excess the Chinese authorities have targeted in other over-heating commodities such as iron ore.

ShFE zinc volumes shrank in both 2019 and 2020 and have risen only marginally this year. Market open interest hit a six-year low at the end of February. It has partially recovered but was still 24% down on last year at the end of May.

The lack of investor interest derives from a less-than-exciting narrative of a market inexorably moving into over-supply after the price spike of 2018.

Yet zinc has stubbornly declined to perform to script, particularly in China.

The largely unexpected price resilience is proving a boon for Western producers. It may prove to be highly propitious for China’s state stockpile managers.

Zinc isn’t classified as a strategic metal in China and the state’s reserves have to some extent been accidental.

Low prices in 2009 and again in 2012 saw what was then the State Reserves Bureau (SRB) coming to the rescue of local producers by buying up surplus metal.

Tonnage and pricing were fully disclosed because the government wanted to send a price signal. As was also the case when the SRB sold 50,000 tonnes back to a resurgent market in 2010.

Net purchases over the 2008-2013 period amounted to 354,000 tonnes, which is what the market assumes is the volume of zinc held by what is now The National Food and Strategic Reserves Administration (NFSRA). The NFSRA is tendering for the sale of 30,000 tonnes of zinc in July with the potential for more monthly sales if required. The auction is only open to industrial users.

It’s a neat way of combining limited firepower with maximum price signalling power as the government tries to dampen the inflationary heat.

It is also intended to alleviate short-term tightness in the Chinese supply chain caused by power rationing in Yunnan province.

The hydro-rich province, which accounts for around 12.5% of the country’s refined zinc production, is currently suffering from drought. All large power users, including zinc and aluminium producers, have been forced to reduce operating rates.

This supply constraint has coincided with a period of super-strong demand growth as Chinese manufacturing rebounds from the pandemic, led by the steel sector, a big zinc user for galvanised sheet. The resulting tensions in the Chinese market-place have been the primary driver of higher zinc prices, both in Shanghai and in London.

China is the world’s largest processor of mined concentrates into zinc metal and its supply woes - a lack of raw material due to COVID-19 lockdowns last year and the current operating cap in Yunnan - have coloured the global picture.

World mine supply surged by 11.3% in the first four months of this year as the disruption caused by lockdowns in key producer countries such as Peru fades.

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