Technicals temper zinc's fundamental ebullience

04 December 2006

MI WEEK IN REVIEW: When this column last appeared two weeks ago, London 3-month zinc was toying with key support at $4,000 per tonne having taken something of a battering from profit-takers.

It was touch and go for a while, particularly on Monday Nov 20, which brought a blip beneath the magic support number, but $4,000 held at the end of the day. Given the ebullience about zinc's prospects, it was no surprise to see the short-term brigade come flooding back into the market to drive 3-month metal up to a high last Monday of $4,580…which is where zinc's technical problems started.

By matching exactly the Nov 10 peak, the touch of $4,580 (or a bit higher, depending on which way you read the LME price feed) has created the potential for a “double-top” chart formation, which even as technical novices we know is a text-book example of a trend reversal pattern.

The pattern will only be completed if zinc falls back again to and through the Nov 20 lows just beneath the $4,000 level but it has evidently given pause for thought among some of the technical players.

It must be said that the many London bulls seem to view this as a good thing—a shaking out of weak, short-term longs that were felt to be cluttering up the front end of the price curve.

Their belief in zinc's fundamentals is unshaken and seemingly unshakeable, many banks advising their clients that any pull-back should be viewed as a buying opportunity.

The reason for that slowing in the stocks downtrend is the increase in warranting activity at Singapore , which we view as symptomatic of events in China . As we looked at in our analysis of the most recent trade date for October, the country has turned back to marginal net exporter over the last reported three-month period.

Zinc's extraordinary price performance—it is still showing a year-to-date price increase of 130%--is going to generate a supply-side response, particularly with smaller operators such as Acadian Gold rushing to bring mines into production (see item below).

But the bull betting has always been, and continues to be, that this will not come in time to prevent LME zinc stocks falling into critical territory. This is what has happened to both copper and nickel at different stages of the recent cycle and look what's happened to them, both in terms of outright price and, particularly in nickel's case, the squeeze on cash metal.

Rising physical premiums, particularly in Europe , are further evidence that LME price developments are not taking place in a real-world vacuum. Demand remains strong and will benefit from the fact that unlike copper, zinc's applications are more in the commercial construction sector (still holding up well in the US) rather than the private-home sector (falling like a stone in the US).

For now, though, the market is going through a consolidatory period with all eyes on the charts, i.e. $4,580. There is no doubt in our mind that the bulls are going to have a go there sooner of later. Its technical significance means it holds the short-term key to likely price developments.