April 4, 2014 / 7:21 AM / 3 years ago

Zinc prices seen rising as China speeds infrastructure work-trade

4 Min Read

* Firm Chinese zinc prices likely to spur financing imports

* Producers cut spot metal selling awaiting price rises

* Speculators build long positions on the LME since February

By Polly Yam

HONG KONG, April 4 (Reuters) - Zinc prices in China are expected to rise in the second quarter after dipping 3 percent in the first three-months of the year, as railway projects boost consumption and investment demand stays strong, industry sources said.

Firm demand should spur further buying in the global market by Chinese importers whose increased purchases in the first quarter helped push London Metal Exchange zinc to a one-year high in March.

The bulk of those imports was used to finance other investments in China such as wealth management products and property-related loans, traders said.

China is the world's top consumer and producer of refined zinc used in galvanized steel, which is widely used in construction projects, fencing along highways and power pylons.

Beijing this week said it plans to speed up the construction of railway lines and highways to help steady its domestic economy.

This is expected to increase zinc consumption in the coming quarter, even though the orders are not new.

"Zinc prices should be next after steel prices rose, thanks to Beijing's plans," said a manager at a factory that uses refined zinc to make alloys. He declined to be named because he was not authorised to talk to media.

The most-traded rebar for October delivery on the Shanghai Futures Exchange hit a near one-month high on Friday, with raw material iron ore this week heading for a second consecutive strong gain.

The Shanghai Futures Exchange front-month zinc contract , which typically reflects spot demand in China, stood at 14,730 yuan per tonne on Friday, up from 14,720 yuan at end-March, after falling nearly 3 percent in the first quarter.

A sales manager at a large zinc producer said customers had increased term shipments in March, while the firm had reduced selling of spot metal in anticipation of higher prices.

"Zinc prices should rise to at least 15,500 yuan in the second quarter," a trader at a small producer said.

Financing Demand

Some refined zinc producers have been using their zinc stocks as collateral for loans from local banks after cutting spot selling, the trader said.

He added that banks were willing to provide loans, estimating that zinc carried low risk as domestic prices were currently hovering around the cost of production.

Banks were also willing to give credit for zinc imports after cutting credit for copper imports in the first quarter as the metal stuggled with low prices and increased bonded stocks, traders said.

With better access to credit and expectations of higher prices, speculators and Chinese funds had been building bets in zinc on the London Metal Exchange since February, according to traders and a source at a private Chinese fund.

"Some have built longs on zinc and shorts on copper on the LME," the fund source said.

A trader at a large trading house in Shanghai said some of the firm's clients had been building zinc long positions on the LME, betting the price of zinc will rise to a 3:1 ratio with copper. The ratio is currently at 3.4:1.

Chinese funds taking massive short positions played a powerful role in copper's slide to around four-year lows last month, signalling the growing force of the sector in global commodities markets.

LME zinc hit a one-year high of $2,143 a tonne on March 5. The price stood at $1,988.75 on Friday.

China's imports of refined zinc surged 84 percent in the first two months of 2014, from a year earlier. (Reporting by Polly Yam; Editing by Gopakumar Warrier)

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