Zinc on the London Metal Exchange extended recent losses to hit a three-month low Tuesday due to speculative selling driven by stock increases and the rebalancing of a major index. And analysts expect further price pressure for the remainder of the week.
Three-month zinc tumbled more than 8% Tuesday to a three-month low of $3,409.75 a metric ton, before climbing towards a PM kerb close of $3,515/ton. Three-month zinc has fallen roughly 19% since the beginning of 2007.
"Technical selling pressure continues in the zinc market, as expected late last week. The 100- and 200-day moving averages have been pierced prompting aggressive system-based selling," said Michael Cuoco of Mitsui Bussan Commodities Inc.
An increase in zinc stocks by 3,100 tons to 94,075 tons Tuesday also damped prices.
"LME stock movements are likely to become an increasingly important determinant of market sentiment as the quarter progresses," said Kevin Norrish of Barclays Capital in a note. "A big increase in LME zinc stocks (Tuesday), the result of 3,475 metric tons of fresh inflows into the Singapore warehouse is in line with the recent pickup in Chinese exports of zinc," Norrish added.
"We will watch to see if this is sustained. If it is, it will be a signal that the big increase in Chinese zinc exports in November is being sustained and this could have bearish implications for market fundamentals," he noted.
In addition, the rebalancing of the Dow Jones-AIG Commodity Index Fund is contributing to the selling, with buyers content to sit on the sidelines, said another base metals trader.
The rebalancing of the DJ-AIGCI began Tuesday and will be fully implemented on Jan. 16. Rebalancing and reweighting means that, in general, the index may reallocate out of commodities that have appreciated in value and into commodities that have underperformed.
LME zinc and nickel are particularly affected by the rebalancing of the DJ-AIGCI Fund because the two metals were particularly strong performers in 2006. Nickel and zinc increased in price around 135% and 110%, respectively, during 2006.
Three-month nickel prices fell to a session low of $30,000/ton, down more than 4% from Monday, before advancing to a PM close of $30,200/ton.
The complex as a whole is weaker due to major fund selling, said a base metals trader. Other commodities have also felt the pressure with crude oil sinking to a 19-month low Tuesday, weighed down by U.S. dollar strength.
"The forecast for zinc, nickel and lead looks severely under pressure during the index rebalancing," Michael Skinner of Standard Bank noted.
"With index reweighting keeping market participants very wary in zinc and nickel markets, the prospect of a price recovery before the end of the week is slim and both markets could remain under pressure," said Norrish.
Prices in dollar a metric ton.
3 Months Metal Bid-Ask Change from
Monday PM kerb
Copper 5625.0-5626.0 Up 19
Lead 1550.0-1553.0 Dn 5
Zinc 3515.0-3520.0 Dn 205
Aluminium 2655.0-2656.0 Up 45
Nickel 30200.0-30250.0 Dn 1200
Tin 10095.0-1010
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