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Tuesday, May 13, 2008


Sustained rally in zinc starting?

Zinc on the London Metal Exchange (LME) is up over 6% this morning as news gets disseminated about the zinc mines being shut down by yesterday's earthquake in China's Sichuan province. This could be a big supply disruption that could last quite a while, as this was a serious quake with a number of zinc mines near the epicenter.

This article predicted this reaction yesterday:

Another London broker said the Chinese earthquake will have a bigger impact on the LME base metals than anyone anticipates. He said the majority of operations in the area of the epicenter are lead and zinc underground mines.

"By (Tuesday) you might find all base metals prices are higher and everyone will be saying it's because of this," a trader said.

Metals Insider reported yesterday that with zinc testing key technical support, the November lows, "black box" technical funds were short zinc to around 75% capacity, a net change of around 880,000 tonnes in the last 2 months:

It was also within touching distance of $2,150, which marks the last line of technical defence, representing the market lows dating back to November 2007.

Our fund-watching sources estimate that the CTA “black box” community is collectively positioned short of zinc to around 75% of historic capacity. As recently as March it was still in net long territory but has sold aggressively into the most recent down leg. The change of positioning over that period is equivalent to around 880,000t (compared to LME inventory of 125,475 tonnes).

These players are purely technically driven, responding to the deteriorating chart dynamics captured above.

Such a huge short position in a relatively small and thinly traded market, combined with key support holding and the big supply disruption from the Chinese earthquake, makes for an explosive move. The bottom put in back in November has held, as we suggested it might at the time, and this successful retest should solidify the bottom. LME zinc inventories have already indicated that the expected huge surge in zinc supply this year is disappointing the bears, as those inventories have been declining in recent weeks rather than climbing, and remain well over 80% down from just a few years ago.

The technicals and the fundamentals may have finally set the stage for a sustained rally in zinc. If so, stocks that have priced in much lower zinc, such as Metalline Mining, which we highlighted last week should do very well from the current depressed levels.

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