Zinc held near a three-year peak on Wednesday with supply set to tighten while aluminium dipped from multi-month highs but could turn higher again as inventories fall and demand rises. Still, some investors question whether zinc can maintain its strength, because while inventories have fallen they remain substantial and easily available.
"At the moment, it's pure momentum after the technical signals got sparked. But fundamentally there are questions," said analyst Dominic Schnider of UBS Wealth Management in Singapore. "We still have a modest overweight in zinc, but it can overshoot. At $2,450-$2,400 that risk for an overshoot is still there. But as we reach these levels I'm really wondering, where is the upside? We still have inventories around."
Benchmark three-month zinc on the London Metal Exchange was at $2,365 per tonne in official rings after hitting its highest level since August 2011 at $2,376 earlier in the session. It failed to trade on the kerb, with the last bid up 0.1 percent at $2,364.50 from Tuesday's close. LME zinc prices are up 15 percent this year, gaining around half of that in July, as global exchange stocks fall and amid a dearth of new mining projects to replace the world's biggest zinc mine, Century in Australia, which is drying up.
But while zinc inventories in LME-monitored warehouses have fallen more than 20 percent since March, they remain a hefty 655,000 tonnes. There are also no lengthy waiting times to access zinc, unlike aluminium stored in some LME-monitored warehouses where buyers have to wait for months. In its quarterly metals report, broker Sucden Financial said the market has been anticipating for almost a year that zinc supply will tighten in the second half of 2015 and into 2016, "suggesting prices may be running ahead of events". Higher zinc prices are also likely to encourage a pick-up in production in China, the Sucden report said.
Sentiment towards aluminium has turned quite bullish, the Sucden report said, with inventories falling and premiums - the amount paid over LME prices for spot metal - remaining high. Benchmark LME aluminium ended down 1.3 percent at $2,016 a tonne after touching $2,054 on Tuesday, the highest level since February last year. It is still up 12 percent so far this year.
"Yesterday we had quite strong gains in the aluminium market mainly because fundamentals have supported prices in the last few trading sessions," said Myrto Sokou, senior research analyst with Sucden Financial. She said demand for the metal, used in drinks cans and automobiles, is picking up and inventories in LME-monitored warehouses are falling. LME stocks have fallen to 4.930 million tonnes, LME data shows, their lowest level since September 2012. In other metals, LME copper remained almost flat, closing up 0.1 percent at $7,050 a tonne.
Underlining expectations of improving copper supply, BHP Billiton said copper production increased to 1.7 million tonnes in fiscal 2014 and would rise to 1.8 million in the current year. Traders have been watching Indonesian elections for signs a new government may relax minerals export laws that since January have halted shipments of nickel, bauxite and copper ores and concentrates, tightening global supplies and lifting prices. New Indonesian President Joko "Jokowi" Widodo said he wants to sit down with mining companies and other parties in a bid to resolve a row over mining policies that has halted $500 million of metal exports per month.
Under Jokowi, Indonesia's regulatory environment might become more accommodating for foreign investment and mining in general, consultancy WoodMackenzie said in a research note. Benchmark LME lead ended down 0.5 percent at $2,207 a tonne, having reached a week high of $2,222.25 in intraday trade. Nickel rose 0.3 percent, finishing at $19,050 a tonne. Tin, untraded in official rings, closed at $22,225 a tonne, up 0.5 percent from Tuesday's close.
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