Commodities -Financial market fears outweigh improving fundamentals in zinc Macquarie Research,

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Commodities Comment
Financial market fears outweigh
improving fundamentals in zinc
 The International Lead Zinc Study Group’s latest data continue to show world
markets for both metals in surplus this year to-date. We continue to think the
zinc market is better balanced than these data suggest and, from a fundamental
perspective, the zinc price should probably be stronger than today. However,
for the moment, financial market fears appear to be outweighing the more
positive physical market picture, with the result there may be good buying
opportunities ahead. In lead, the short-term outlook is further complicated by
the government’s crackdown on substandard lead-acid battery makers in
China.
Latest news
 Most LME base metals prices tumbled in trading on Wednesday, despite
publication of some positive macro-economic data points. Copper closed with
the heaviest loss on the day of over 3%, while lead and zinc also dropped by
close to 3%. At present, exchange traded metals prices appear to be
overwhelmed by worries related to China’s economic growth slowing, with
investors for the moment overlooking to some extent the supply side issues in
a number of markets. Chinese buyers have reportedly been few and far
between in recent sessions, both investment buyers, who may be bearish
about the short-term outlook, and physical buyers who may anticipate better
purchasing opportunities ahead. The exception to weakness in base metals on
Wednesday was seen in tin, which we think is the tightest of the metals
markets and recorded a rise of 2.7%. In contrast to base metals, all precious
metals prices were up on the day, with gold gaining 1.3% and silver adding
3.1%.
 US consumer price inflation slowed to 0.3% MoM and 3.9% YoY in
September, the lowest readings in three months. Meanwhile, housing
starts accelerated by 15% MoM to 658,000 units at an annualised rate, while
vacancy rates for apartments are now running at five-year lows, although
permits for new builds fell 5% MoM to 594,000 units at an annualised rate.
 In Peru, negotiations between Freeport-McMoRan and unions at the
Cerro Verde copper mine to seek a resolution to the strike that has now
been running for nearly three weeks are scheduled for Thursday. Unions are
reportedly requesting a pay rise of 11%, while the company has offered only
3%. The 300,000tpa-plus mine is reported to be operating at 40% of capacity
after the company recruited some non-union staff to replace striking workers.
 In feedback from some of our commodities team currently touring in
China, highlights include reports from large steel mills of declining orders and
that aggregate steel output should probably be reduced in the short term but
individual producers are reluctant to respond for fear of losing market share.
However, some improvement in order intake is expected before year end.
Meanwhile, with spot iron ore prices continuing to fall, mills are typically
buying only minimal tonnages and, more ominously, with spot prices now
~$20/t below Q4 contract prices some defaults on contract purchases look
increasingly likely. In contrast, domestic coking coal prices are reported to be
rising, owing in part to infrastructure constraints.