Report Industry Investment Rating No relevant content provided. Core Viewpoints of the Report - In the third quarter, the pattern of stronger LME zinc and weaker SHFE zinc became more apparent. Macroscopically, domestic narratives such as anti - involution initially boosted non - ferrous metal prices, and the domestic economy had a weak recovery. Subsequently, the Fed's interest rate cut and strengthened subsequent rate - cut expectations drove up the metal sector. However, the price trends of LME zinc and SHFE zinc diverged significantly. Fundamentally, the center of LME zinc moved up while SHFE zinc was suppressed and continued to build a bottom. This was due to overseas smelter cut - offs and production reductions, while domestic smelter operating rates were strongly maintained driven by profits, leading to continuous depletion of overseas inventories. Additionally, the weakening of the internal - external price ratio and its trending phenomenon made it difficult to open the export window in China, resulting in an over - supply of refined zinc that was difficult to consume. It is predicted that SHFE zinc will still follow a bearish logic, but the downward amplitude will be limited due to the support of LME zinc, and it is expected to have a weak and volatile trend in the fourth quarter, with an operating range of 21,580 - 22,300 yuan/ton [1]. - The strategies include: from now until the end of October, if overseas inventories are not visibly increased and the rate - cut expectation remains unchanged, the internal - external positive arbitrage logic remains. When the export window opens or approaches, internal - external reverse arbitrage should be the main strategy. Also, conduct high - selling and low - buying within the range, and sell hedges or sell out - of - the - money call options on rallies [2]. Summary by Relevant Catalogs Chapter 1: Viewpoint Summary - The pattern of stronger LME zinc and weaker SHFE zinc is obvious in the third quarter. The subsequent trend of SHFE zinc is expected to be weakly volatile, with a predicted operating range of 21,580 - 22,300 yuan/ton in the fourth quarter [1]. - Investment strategies are proposed, including internal - external arbitrage operations and other trading strategies [2]. Chapter 2: Market Review - In the first half of the year, zinc prices were weak in January and then had a wide - range oscillation in the first quarter. The core contradiction in the first quarter was the initial manifestation of loose expectations and the weakening of actual demand. In January, the expected increase in zinc ore production and the winter stockpiling demand of zinc smelters jointly pushed up the zinc concentrate processing fee. From February to March, the reduction in smelter production around the Spring Festival led to a lower inventory - building amplitude than in previous years, and the absolute value of social inventory was at a historical low. Coupled with the "Golden Three, Silver Four" peak - season expectation, it provided some support for zinc prices. In the second quarter, the main market fluctuations of zinc ingots were caused by Trump's reciprocal tariffs, which impacted the trade situation and market sentiment. In early April, zinc prices followed the market decline due to the unexpectedly high tariff intensity and global pessimistic sentiment. Then, until the end of May, zinc prices returned to the fundamental logic, and the oscillation amplitude of SHFE zinc weakened from strong to weak, maintaining a supply - surplus logic of strong supply and weak demand [3]. - In the third quarter, the core trading logic was the game between macro - level benefits and weak fundamentals, with an overall trend of rising first and then falling. Macroscopically, anti - involution sentiment provided some upward impetus to zinc, especially due to its common demand attributes with both black and non - ferrous metals, and the increase was more prominent. The Fed's interest rate - cut expectation and the weakening of the US dollar index also provided support. However, with the supply growth far exceeding the demand growth, the supply - surplus pattern of SHFE zinc's fundamentals was obvious. As a result, the trend of zinc prices was more entangled compared with other non - ferrous metals. At the end of the quarter, the Fed's interest rate cut met expectations, and the positive impact of the rate - cut story was exhausted, resulting in a weak and volatile trend [3]. Chapter 3: Core Focus Points 3.1 Macro - Outlook: Optimistic - Globally, major economies led by the US have started an interest rate - cut cycle. The Bank of Canada and the Bank of Japan recently cut interest rates by 25 basis points, following the Fed. According to the Fed's economic summary on September 17, most officials expect the interest rate to be in the range of 3.50 - 3.75 this year, indicating at least two more rate cuts, while some are more conservative with an expectation of 4.0 - 4.25. The median expectations of the federal funds rate at the end of 2025, 2026, and 2027 are lowered to 3.6%, 3.4%, and 3.1% respectively. The short - term rate - cut expectation has been digested by the market, and the subsequent continuous rate cuts will drive up the prices of basic metals [8]. - In terms of employment, the median expectations of the unemployment rate in the next two years are lowered to 4.4% and 4.3%. Fed Chairman Powell proposed that this rate cut is a risk - management measure to cope with the rapid downward revision of the labor market. The market generally expects a correlation between employment data and the benchmark interest rate [11]. - Domestically, the economy started a weak recovery from July's anti - involution to August. Policies have achieved good results in supporting the overall economy. In August, China's exports denominated in US dollars increased by 4.4% year - on - year, and imports increased by 1.3% year - on - year. In terms of prices, China's CPI in August decreased by 0.4% year - on - year from positive, and the core CPI increase rebounded to 0.9%; the year - on - year decline of PPI narrowed to 2.9%. In the future, in addition to the main tones of industrial anti - involution and a unified large market, two major policies that will have a greater impact on basic metals this year are the moderately loose monetary policy mainly through reverse repurchase and the local debt and special debt policies to expand domestic demand. Domestic macro - factors are expected to have a positive impact on basic metals this year, and the extent depends on the policy scale [15][16]. - The overall macro - impact on future zinc prices has two interpretations centered around the US dollar index. The downward trend of the US dollar index is inevitable, driven by the Fed's monetary policy and Trump's tariff policy. The decline of the US dollar index is beneficial to commodities denominated in US dollars. However, if economic growth is suppressed by inflation and tariffs, leading to a weakening of demand and employment data, it will have a negative impact. Currently, according to the Samuelson's rule, the economy is not on the recession track, so in the short term, the overall outlook is positive, and long - term macro - data needs to be continuously monitored [18]. 3.2 Internal - External Price Difference: Opportunities for Export and Arbitrage - Since June this year, the price difference between LME zinc and SHFE zinc has been expanding, and it still shows an expanding trend in terms of import profit and loss. The main reason is the difference in internal and external fundamentals. Overseas smelters have low operating willingness due to the low processing - fee benchmark at the beginning of the year (80 US dollars/dry ton) and the impact of losses in 2024. In contrast, domestic smelters have cost advantages, and the increase in processing fees in the first half of the year strongly drove up their operating rates [20]. - It is recommended that investors pay attention to the internal - external reverse - arbitrage opportunity of going long on the domestic market and short on the overseas market. Currently, the export profit and loss is approaching the break - even line, and there is hope for zinc ingot exports to Southeast Asia to make a profit at the end of the year. After zinc ingot exports start, the internal - external price difference may return to a reasonable range [25]. 3.3 Change in Term Structure: Domestic Loose Expectations May Be Exhausted - The term structure of SHFE zinc quietly changed at the end of August. Under the dual influence of macro - narratives such as anti - involution and the oscillation of processing fees, SHFE zinc has changed from a B - structure to a C - structure [26]. - The inconsistent internal and external inventories are also the main factor for the expanding price difference. LME inventory has been in a de - stocking cycle since the beginning of the year, and the change in inventory reveals the weak supply of overseas smelters and the change in inventory structure. The continuous increase in the proportion of canceled warrants in LME warehouses means that more inventory is used for delivery or pick - up rather than storage [27]. - The market may be trading on the logic that the processing fee will decline, leading to losses in the smelting end and a tight supply of refined zinc in the long - term. The start of losses in the smelting end will lead to a decrease in the demand for the mining end, resulting in a tight supply of zinc elements as a whole [29]. Chapter 4: Valuation Feedback and Supply - Demand Outlook 4.1 Zinc Concentrate - **Overseas Mine Production**: According to ILZSG statistics, from January to July 2025, the global zinc concentrate production was 7.1918 million tons, a year - on - year increase of 6.91%; among them, overseas zinc concentrate production was 4.8518 million tons, a year - on - year increase of 7.91%. Overseas zinc mines have a stable production increase, with most of the increment coming from leading mining enterprises. Due to problems such as force majeure, grade decline, and low recovery rate in mines last year, the production increment this year is obvious, and there is a significant improvement in the second quarter compared with the first quarter. In terms of price, the CIF price of zinc concentrate is tied to LME zinc. Although the imported - ore TC is gradually rising, domestic mines still have a price advantage. In terms of cost, the C1 cost of overseas mines was about 1,950 US dollars/ton at the beginning of the year, and with the obvious upward trend of LME zinc, mines are generally profitable [33][35]. - **Domestic Mine Production**: According to SMM statistics, from January to July 2025, the domestic zinc concentrate production was 2.0679 million metal tons, a cumulative year - on - year decrease of 0.76%. With the production increase of domestic mines in the second quarter, the mine output has increased, but it is still in a relatively tight situation compared with overseas. Affected by the high TC, domestic mine profits have shrunk. Coupled with the weak trend of SHFE zinc, it is difficult for the TC to maintain an upward trend in the future [37]. - **Imports**: Due to the significant recovery of overseas mine production this year, the supply - surplus situation in the mining end has been further transmitted to the import end. The imported zinc concentrate TC has been driven to rise, from a low of - 20 US dollars/dry ton at the beginning of the year to the latest 100 US dollars/dry ton. The processing profit of imported ore has gradually recovered, but the continuous weakening of the internal - external price ratio makes it difficult to increase the smelting end's willingness to purchase. From January to August 2025, the cumulative import of zinc concentrate was 3.5027 million metal tons, a cumulative year - on - year increase of 43.07% [41][42]. - **Overall Supply and Inventory**: Combining domestic production and imports, the total supply from January to August was 4.1662 million metal tons, a cumulative year - on - year increase of 14.14%. The increment mainly came from the recovery of overseas mine production and the production increase of domestic projects. In terms of inventory, the zinc - ore port inventory is likely to maintain a seasonal stable increase in the future, and the smelter's raw - material inventory days will remain stable. In the long - term, in the fourth quarter, due to the winter shutdown of some mines, the domestic mine supply will shrink to some extent, and the processing fee will maintain a weak and volatile trend, while the imported processing fee is likely to maintain an upward trend. After the internal - external price ratio strengthens, imports may make up for the supply shrinkage. Affected by the strong smelting end, there may be a slight shortage of zinc ore in 2026 [44]. 4.2 Zinc Ingot - **Overseas Inventory and Structure**: Most of the time this year, LME zinc was in a contango structure because of the large number of overseas smelter cut - offs and production reductions, indicating an expected supply shrinkage and a stronger long - term price. In late March, due to the unexpectedly high Trump tariffs, the long - term pessimistic sentiment was short - lived. By June, LME zinc started continuous de - stocking, the inter - month price difference narrowed, and the spot price gradually strengthened due to the decrease in the number of deliverable warrants, forming the current deep - back structure. Although the current inventory has not reached the extreme value, its impact on prices, resonating with the interest rate - cut expectation, forms an upward driving force [50]. - **Domestic Zinc Ingot Production**: According to SMM data, from January to July 2024, the domestic refined - zinc production was about 3.8425 million tons, a cumulative year - on - year increase of 4.65%. The supply - surplus situation in the mining end has been continuously transmitted to the ingot end. The upward trend of TC and the stable by - product revenue have repaired the smelter's profit, driving up the operating rate and putting pressure on the supply end, which suppresses zinc prices [52]. - **Import and Export**: From January to May 2025, China's net import of refined zinc was about 154,900 tons, a cumulative year - on - year decrease of 15.08%, mostly from countries along the Belt and Road. Affected by the internal - external price ratio, the import window has been closed for a long time this year. In terms of exports, the import profit and loss still shows a weakening trend. Recently, the export profit and loss of Southeast Asian spot zinc is approaching the break - even line, and there is hope for the export window to open in 2025. According to past data, large - scale exports require the import profit and loss to be below - 4,800 yuan/ton. Currently, the internal - external arbitrage is still in a positive - arbitrage trend [55]. 4.3 Demand - **Domestic Demand** - **Real Estate**: This year, the real - estate industry in China is characterized by a decline in development investment, a decrease in sales area and sales volume, and poor capital availability. In the future, although macro - policies will provide some support, the weak self - demand will still lead to a weak trend. Real - estate policies mainly focus on the structural adjustment of the supply end and the loosening of the demand end. The supply end includes the revitalization of existing stocks, the acquisition of existing houses with special bonds and their transformation into affordable housing to accelerate commodity de - stocking, and strict control of new land use. The demand end includes lowering the first - home mortgage rate and provident - fund rate and relaxing purchase restrictions. Overall, this year's real - estate policies aim to maintain stability and transformation, and the overall basic situation is expected to be maintained, with the decline difficult to deepen further. However, considering the poor overall economic environment, real - estate developers' willingness to acquire land is low, and the area from land acquisition to new construction and completion of houses will continue to decline [61]. - **Automobile**: According to data from the China Association of Automobile Manufacturers, from January to August 2025, the cumulative automobile production reached 21.051 million vehicles, a year - on - year increase of 12.7%; the sales volume was 21.128 million vehicles, a year - on - year increase of 12.6%, for the first time achieving a production and sales volume of over 20 million vehicles in the first eight months. The cumulative production and sales of new - energy vehicles were 9.625 million/9.62 million vehicles, a year - on - year increase of 37.3%/36.7%, with a penetration rate of 45.5%. From January to August, the export volume was 4.292 million vehicles, a year - on - year increase of 13.7%, and the single - month export volume in August was 611,000 vehicles, a year - on - year increase of 19.6%. The export volume of new - energy vehicles from January to August was 1.532 million vehicles, a year - on - year increase of 87.3%, accounting for 35.7% of the total automobile export volume, and the single - month export volume in August was 224,000 vehicles, a year - on - year increase of 100%. Looking forward to 2026, according to the "Automobile Industry Stable - Growth Work Plan (2025 - 2026)", the sales volume of new - energy vehicles is expected to reach 18 - 20 million vehicles, accounting for more than 50% of the total automobile sales volume, becoming the absolute market leader. The total automobile export volume will exceed 5 million vehicles in 2026, and the proportion of new - energy vehicle exports will exceed 60%. With continuous policy subsidies to promote consumption, the stable growth of the automobile industry will stably drive the demand for zinc, maintaining an annual zinc consumption of 700,000 - 900,000 tons [66]. - **Home Appliances**: In 2026, the white - goods industry is expected to remain stable. In the export market, the double risks of the US's additional tariffs on Chinese home - appliance products and emerging markets have an impact on home - appliance production. Since March

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